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43fi CITY HAI.l. 



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IN THE 



Pntteh ^MtB fflnurt of ^]jp»k 




FOR THE NINTH CIRCUIT 



CLARENCE JAMES LOPEZ, 

Appellant, 



vs. 



/ 



No. 22,525 



UNITED STATES OF AMERICA, 

Appellee. 



On Appeal from the Judgment of 

The United States District Court 

For the Distria of Arizona 

BRIEF FOR APPELLEE 



EDWARD E. DAVIS 
United States Attorney 
For the Distria of Arizona 

JO ANN D. DIAMOS 
Assistant United States Attorney 
Attorneys for Appellee 



FILED 

APR 9 1968 
-WM. a LUCK CLERK. 



SUBJECT INDEX 

I. Jurisdictional Statement of Facts 1 

II. Statement of Facts 2 

III. Opposition to Specification of Errors 2 

IV. Argument 2 

V. Conclusion 6 

CASE INDEX 



Application of Gault (1967) 387 U.S. 1, 

87 S. Ct. 1428 5, 6 

Glasser v. United States, (1942) 315 U.S. 60, 

62 S. Ct. 457, 86 L.Ed. 680 6 

Miranda v. Arizona, (1966) 384 U.S. 437, 

17 L.Ed. 2d 694, 86 S. Ct. 1602 6 



IN THE 

P^mteh States fflnurt of ^pp^ab 

FOR THE NINTH CIRCUIT 



CLARENCE JAMES LOPEZ, 

Appellant, 



vs. 



UNITED STATES OF AMERICA, 

Appellee. 



' No. 22,525 



On Appeal from the Judgment of 

The United States District Court 

For the Distria of Arizona 



BRIEF FOR APPELLEE 



I. 



JURISDICTIONAL STATEMENT OF FACTS 

The Government accepts and hereby adopts Appellant's 
Jurisdiaional Statement. 



11. 

STATEMENT OF FACTS 

The Government accepts and hereby adopts Appellant's 
Statement of Facts, with the addition that will be set out in 
the argument. (Hereinafter the Clerk's Record of the Tran- 
script on Appeal will be referred as to "RC," the Reporter's 
Transcript of the testimony will be referred to as "RT," the 
number following will refer to the page and the number fol- 
lowing "L" will refer to the line; the Appellant, Clarence 
James Lopez, will be referred to as "Juvenile" or "Appellant.") 



III. 

OPPOSITION TO 
SPECIFICATION OF ERRORS 

The District Court did not err in admitting into evidence 
the statement made by the Juvenile. 



IV. 
ARGUMENT 

The Appellant, with the presence of his moth- 
er, was advised as to his "rights" and did make 
a voluntary waiver of those rights. 

The testimony of Special Agent Donald Marsland showed 
that the defendant was asked to bring his mother into the 



room after he and another FBI agent had identified themselves 
and told him they were federal ofiicers. They asked him if he 
would mind talking to them and he said that he would not. 
They told him they wanted to talk to him about the attack 
on his grandfaher, Xavier Rios. They asked if his mother 
was present and asked that she join them. They read him his 
"Miranda" rights from a form, Government's Exhibit 24 in 
Evidence, and it is as follows: 

"YOUR RIGHTS 

Place: Tucson 
Date: June 2, 1967 
Time: 1:26 p.m. 

"Before we ask you any questions, you must under- 
stand your rights. 

"You have the right to remain silent. 

"Anything you say can be used against you in court. 

"You have the right to talk to a lawyer for advice 
before we ask you any questions and to have him with 
you during questioning. If you cannot afford a lawyer, one 
will be appointed for you before any questioning if you 
wish. 

"If you decide to answer questions now without a lawyer 
present, you will still have the right to stop answering at 
anytime. You also have the right to stop answering at 
anytime until you talk to a lawyer. 

"A lawyer will also be provided for you now, if you 
wish, by the Federal Public Defender's Office, Phoenix, 
Arizona, whom you may call at 253-7907. 

"WAIVER OF RIGHTS 

"I have read the statement of my rights and I under- 
stand what my rights are. I am willing to make a state- 
ment and answer questions. I do not want a lawyer at this 



time. I understand and know what I am doing. No promises 
or threats have been made to me and no pressure or coer- 
cion of any kind has been used against me. 

I si Clarence Lopez 

"Witness: Donald W. Marsland, SA, FBI 

San Xavier, June 2, 1967 

"Witness: Alan H. Harrigal, SA, FBI 

San Xavier, June 2, 1967 

Time: 1:32 p.m." 



They had the Juvenile explain to them what had just 
been read to him. Then they asked him if there was anything 
he would want explained. The Juvenile asked to have ex- 
plained the word "coercion" to him (RT 110 thru 116). He 
was left alone to discuss it with his mother (RT 119, L 21- 
22). It took from 1:26 p.m. to approximately 1:32 p.m. to 
explain his rights to him and to discuss his rights with him 
and to have his mother discuss his right with him alone (RT 
110, L 15 and 122, L 8). He then was asked if he waived 
his rights and was willing to answer questions. He stated he 
would, and he executed the waiver (RT 1 14) . 

The Juvenile's counsel then asked to have an opportunity 
to place the Juvenile on the stand for the purpose of showing 
no understanding of the waiver (RT 126, L 9-11). The 
Juvenile then waived his right to take the stand (RT 126, 
L 18-19). The matter was then argued and the Court found: 

"THE COURT: Everything that is before the Court 
indicates he did understand his right, that the agents were 
very, very careful to see that he did and all of the evidence 



in the case indicates he practically demonstrated his un- 
derstanding of what they were trying to get across to him. 
I think we would have a much more serious grounds for 
complaint if they had taken him away from his home and 
had taken him to some office where he was in strange 
surroundings. But they went to his home, in the presence 
of his mother, they insisted she come in and be there so 
he could have the benefits and comfort of her presence. 
Apparently immediately that suspicion began to focus on 
him, that they again advised him of his rights. I think the 
evidence makes it clear that he was advised of his rights 
and all of his rights and that his statement, that any state- 
ment he made, I assume from what has been said, before 
he did make a statement, was made voluntarily and under- 
standing his rights and without any coercion, any prom- 
ises or threats and it was voluntary. Therefore the objection 
to the statement is overruled." (RT 127, L 18 to 128, 
L 11) 

The Juvenile gave several different versions during the 
interview. Several times his mother, when he would give one 
of his versions, would state: "Clarence, you are not telling 
them the truth, tell them the truth". (RT 131, L 1-2; 133, L 
8-9) He then stated that he did it. He stated, "I did it with 
another guy." (RT 133, L 10) 

At this point, the agent again advised him as to his rights 
and told the Juvenile to discuss it with his mother. They 
left the room (RT 133). They returned in about ten minutes 
and the Juvenile then requested an attorney (RT 133, L 
16-17). 

He was immediately taken to Tucson before the United 
States Commissioner and an attorney was appointed for him 
(RT 133, L 23-24). 

In the Application of Gault, (1967) 387 U.S. 1, 87 S.Ct. 
1428, the Supreme Court stated at page 55 : 



"We conclude that the constitutional privilege against 
self-incrimination is applicable in the case of juveniles 
as it is with respect to adults. We appreciate that special 
problems may arise with respect to waiver of the privilege 
by or on behalf of children, and that there may well be 
some differences in technique — but not in principle — 
depending upon the age of the child and the prescence 
and competence of parents. The participation of counsel 
will, of course, assist the police, juvenile courts and appel- 
late tribunals in administering the privilege." 

Appellant argues that the Court should adopt the recom- 
mendations of the President's Crime Commission which were 
quoted in the Application of Gault, Supra, but the Supreme 
Court did not adopt them. 

On appeal, the evidence must be construed in the light 
most favorable to the Government. Glasser v. United States, 
(1942) 315 U.S. 60, 62 S.Ct. 457, 86 L.Ed. 680. 

The Court did find the statement was voluntarily made 
and an intelligent waiver of rights was made. Appellant argues 
at page 16 of the Opening Brief, that the Juvenile should have 
been allowed to complete his statement since he had waived 
his rights. Counsel overlooks the rule of Miranda v. Arizona 
(1966) 384 U.S. 437, 17 L.Ed. 2d 694, 86 S.Ct. 1602, that 
a defendant has the right to refuse to answer questions at 
any time. 

V. 
CONCLUSION 

It is resectfully submitted that the statement of the Juvenile 
was made nfter he was fully advised as to his rights, under- 
stood them, and waived them. 



RespeafuUy submitted, 



Edward E. Davis 
United States Attorney 




^/^f^-p 



Jo Ann D. Diamos 
Assistant United States Attorney 
Attorneys for Appellee 



I certify that, in conneaion with the preparation of this 
Brief, I have examined Rules 18, 19 and 39 of the United 
States Court of Appeals for the -^inth^Circuit, and that in 
my opinion, the foregoing Brief ^yy full comnliancp' with 
those rules. "^^0/ Cc/^^^Uy!!^ ^(lAt:^'0^-^ 

Jo Ann D. Diamos 
Assistant United States Attorney 




<? 



i> 



Three copies of the Brief of Appellee mailed this 
day of April, 1968, to: 

David S. Wine 

403 Transamerica Building 

Tucson, Arizona 

Attorney for Appellant 



NO. 22527^ 
IN THE UNITED STATES COURT OF APPEALS 
FOR THE NINTH CIRCUIT 

WILLIAM DUKE ANDREWS, 

Appellant, 
vs. «f f ' • ^ 4 yo.f»rj 

UNITED STATES OF AMERICA, 

Appellee. 



APPELLEE'S BRIEF 



APPEAL FROM 

THE UNITED STATES DISTRICT COURT 

FOR THE SOUTHERN DISTRICT OF CALIFORNIA 

CENTRAL DIVISION 



EICED 



WM. MATTHEW BYRNE, JR. , 

United States Attorney, 

ROBERT L. BROSIO, 

Assistant U. S. Attorney, 
Chief, Criminal Division, 



JAMES E. SHEKOYAN, 
JUN ^ 8 IQPP Assistant U. S. Attorney, 

1200 U. S. Court House 
)NM. B, LUCKa CLERK 312 North Spring Street 

Attorneys for Appellee, 
United States of America 



NO. 2 2 5 2 7 
IN THE UNITED STATES COURT OF APPEALS 
FOR THE NINTH CIRCUIT 

WILLIAM DUKE ANDREWS, 

Appellant, 
vs. 
UNITED STATES OF AMERICA, 

Appellee. 



APPELLEE'S BRIEF 



APPEAL FROM 

THE UNITED STATES DISTRICT COURT 

FOR THE SOUTHERN DISTRICT OF CALIFORNIA 

CENTRAL DIVISION 



WM. MATTHEW BYRNE, JR. , 
United States Attorney, 

ROBERT L. BROSIO, 

Assistant U. S. Attorney, 
Chief, Criminal Division, 

JAMES E. SHEKOYAN, 

Assistant U. S. Attorney, 

1200 U. S. Court House 
312 North Spring Street 

Attorneys for Appellee, 
United States of America 



TOPICAL INDEX 

Page 

Table of Authorities ii 

I JURISDICTIONAL STATEMENT 1 

II STATUTES INVOLVED 2 

III STATEMENT OF THE CASE 4 

IV STATEMENT OF FACTS 5 

V ISSUE PRESENTED 11 

VI ARGUMENT 11 

VII CONCLUSION 14 
CERTIFICATE 15 



TABLE OF AUTHORITIES 

Cases Page 

Dusky V. United States, 

271 F. 2d 385 (8th Cir. 1959), 

rev'd on other grounds 362 U.S. 402 13 

Formhals v. United States, 

278 F. 2d 43 (9th Cir. 1960) 13 

Meador v. United States, 

332 F. 2d 935 (9th Cir. 1964) 13 

Stone V. United States, 

358 F. 2d 503 (9th Cir. 1966) 13 

Statutes 

Title 18, United States Code, §495 2 

Title 18, United States Code, §1708 2, 3 

Title 18, United States Code, §4208(a)(2) 2 

Title 18, United States Code, §4244 13 

Title 28, United States Code, §1291 2 

Title 28, United States Code, §1294 2 



11 



NO. 2 2 5 2 7 
IN THE UNITED STATES COURT OF APPEALS 
FOR THE NINTH CIRCUIT 

WILLIAM DUKE ANDREWS, 

Appellant, 
vs. 
UNITED STATES OF AMERICA, 

Appellee. 



APPELLEE'S BRIEF 



I 

JURISDICTIONAL STATEMENT 

On July 27, 1967, a six count indictment was returned 

against appellant by the Federal Grand Jury for the Southern 

1/ 
District of California, Central Division [C. T. 2]. 

The indictment charged appellant with the violation of 
Federal laws relating to the possession of stolen mail and the 
forgery of United States Treasury Checks [C. T. 2]. 

Appellant was convicted on all six counts at a trial before 
the District Court on August 16, 1967 [C. T. 21, 38]. Trial by 



l_l "C. T. " refers to clerk's transcript. 

1. 



jury had previously been waived by the appellant [C T. 20]. 

On October 23, 1967, appellant was sentenced to the cus- 
tody of the Attorney General for ten years on Counts One, Three 
and Five, and was sentenced to five years on Counts Two, Four 
and Six, with the sentence on all six counts to begin and run con- 
currently. The sentence on all counts was made subject to Title 
18, United States Code, Section 4208 (a) (2). The appellant was 
further ordered to pay a fine of $500 as part of the sentence in 
Counts One, Three and Five [C. T. 38]. 

Appellant filed a timely Notice of Appeal on October 23, 
1967 [C. T. 47]. 

The jurisdiction of the District Court was predicated on 
Title 18, United States Code, Sections 495 and 1708. This Court 
has jurisdiction under Title 28, United States Code, Sections 1291 
and 1294. 



II 
STATUTES INVOLVED 

Section 495 of Title 18, United States Code, provides in 
pertinent part as follows: 

"Whoever falsely makes, alters, forges, or 
counterfeits any deed, power of attorney, order, 
certificate, receipt, contract, or other writing, for 
the purpose of obtaining or receiving or of enabling 
any other person, either directly or indirectly, to 

2. 



obtain or receive from the United States or any 
officers or agents thereof, any sum of money ..." 
shall be guilty of an offense. 

Section 1708 of Title 18, United States Code, provides in 
pertinent part as follows: 

"Whoever steals, takes, or abstracts, or 
by defraud or deception obtains, or attempts so to 
obtain, from or out of any mail, post office, or sta- 
tion thereof, letter box, mail receptacle,, or any 
mail route or other authorized depository for mail 
matters or from a letter or mail carrier, any letter, 
postal card, package, bag, or mail, or abstracts or 
removes from any such letter, package, bag, or mail, 
any article or thing contained therein, or secretes, 
embezzles, or destroys any such letter, postal card, 
package, bag, or mail, or any article or thing con- 
tained therein; or . . . 

"Whoever buys, receives, or conceals, or 
unlawfully has in his possession, any letter, postal 
card, package, bag, or mail, or any article or thing 
contained therein, which has been so stolen, taken, 
embezzled, or abstracted, as herein described, 
knowing the same to have been stolen, taken, 
embezzled, or abstracted ..." shall be guilty of 
an offense. 



3. 



Ill 

STATEMENT OF THE CASE 

Appellant was indicted on July 27, 1967, by the Federal 
Grand Jury for the Southern District of California, Central 
Division. Counts One, Three and Five of the six-count indictment 
charged that the appellant unlawfully had in his possession, on 
July 16, 1965, August 10, 1965, and September 11, 1965, the 
contents of letters he knew had been stolen from the mail. 
Counts Two, Four and Six of the indictment charged the appellant 
with forging the endorsement of payees on three United States 
Treasury checks [C. T. 2]. 

The appellant waived a trial by jury and a court trial was 
held on August 16, 1967, before the Honorable Peirson M. Hall, 
at which time the appellant was found guilty of all six counts of 
the indictment [C. T. 21]. 

On September 18, 1967, the trial court, on its own motion, 
appointed a psychiatrist to conduct an examination as to the appel- 
lant's mental competency both at the time of the offense charged 
and at the time of trial [C. T, 22-23]. The psychiatrist prepared 
two reports, which were filed with the court on October 9, and 
October 23, 1967 [C. T. 26, 39]. 

On October 23, 1967, the appellant was sentenced as 
indicated in the Jurisdictional Statement. 

Appellant filed a timely Notice of Appeal on October 25, 
1967 [C. T. 47]. 

4. 



IV 
STATEMENT OF FACTS 

Norman Gary Whitley was called as a witness by the 
Government and testified that he was employed as a mail carrier 

until January, 1966, when he was discharged for stealing mail 

2/ 
[R. T. 17]. - 

Starting in May, 1965, he gave to the appellant United 
States mail containing United States Treasury checks addressed 
to payees J & O Kesee, Hans J. Christensen and others, in 
exchange for cash from the appellant [R. T. 20, 25, 34]. 

The Government called as witnesses, payees of two of the 
Treasury checks, Odessa Kesee and Brenda L. Scott. Each 
testified that she did not know the appellant, did not receive the 
Treasury check addressed and made payble to her, did not 
authorize the appellant to sign her endorsement to the check, and 
did not authorize the appellant to cash the check [R. T. 46-48 and 
80-82]. 

Victor DiLoreto, Jr. , a postal inspector, was called as 
a Government witness and testified that on May 3, 1967, he 
interviewed the appellant and at that time the appellant was shown 
the United States Treasury checks marked as Government's 
Exhibits 1, 2 and 3, and denied signing the endorsements of the 
payees, but admitted signing his own signature as the second 



2_l "R. T. " refers to Reporter's Transcript. 

5. 



endorsement on each check and that the checks went through his 
bank account [R. T. 60-63]. 

Exemplars of the appellant's known handwriting were 
admitted into evidence by stipulation [R. T. 64], 

Simeon Wilson, a qualified Government handwriting expert, 
was called as a Government witness and testified that he had con- 
ducted an examination of the handwriting on the back of the checks 
admitted in evidence and made a comparison of this handwriting 
with appellant's known handwriting. Mr. Wilson testified that 
the endorsements of the payees and the second endorsements in 
the name of William Andrews were written by the appellant [R. T. 
78]. 

The appellant, William Duke Andrews, testified in his own 
behalf that during 1965 he ran a check cashing service and cashed 
approximately $4000 worth of checks. He denied that he signed 
the endorsement of the payees on the Treasury checks admitted 
into evidence [R. T. 90-91, 94-95]. Appellant claimed he could 
not remember if he deposited Government Exhibit 2 in his savings 
account or if he prepared the deposit slip [R. T. 97-98]. He 
alleged that Mr. Whitley had authority to withdraw money from 
his savings account, but this was denied by Mr. Whitley [R. T. 
98, 125-126]. 

After cross-examination of the appellant was completed, 
the trial Court questioned him in part as follows: 

"THE COURT: By the way, you say you are 

collecting total disability? 

6. 



"THE WITNESS: Yes, sir. 

"THE COURT: What is your disability? 

"THE WITNESS: Total disability. 

"THE COURT: What is the matter with you? 

"THE WITNESS: I can't think of the term they 



used. 



"THE COURT: Does your back hurt? 

"THE WITNESS: No, it is my head. I got shell- 
shocked when I was in the service. 

"THE COURT: Is there something wrong with 
your head? Are you all right now? 

"THE WITNESS: I think I am, sir. 

"THE COURT: I mean, is there some question 
about your competency to understand this trial and know 
what is going on? 

"THE WITNESS: I wouldn't think so, sir. [R. T. 
116] 

>!< i'fi s[: 

"THE COURT: So what are you doing now? 
"THE WITNESS: Right now I am doing yard 
and lawn work. 

"THE COURT: You mean piece work? 
"THE WITNESS: Piece work. 
"THE COURT: You have regular customers? 
"THE WITNESS: I have regular customers. 
"THE COURT: How many can you take care of 
7. 



in a month? 

"THE WITNESS: I can take care of a lot more 
than I do, but the regular customers are about, I 
would say, nine or ten a month. 

* * * 

"THE COURT: Did you tell your counsel that 
you were disabled because of an injury to your head? 

"THE WITNESS: Yes, sir. 

"THE COURT: And that you were shell-shocked? 

"THE WITNESS: It isn't shell shock, I am 
trying to get the word, they call it dementia praecox. 

"THE COURT: Dementia praecox? 

"THE WITNESS: Yes, sir. 

"THE COURT: Were you aware of this counsel? 

"MR. MIRECKI: No, I was not aware of it. He 
told me he was getting a Government check but never 
told me what for, your honor. 

"THE COURT: I see. 

"You are satisfied that you are mentally com- 
petent and you understand these proceedings? 

"THE WITNESS: Yes, sir, I think I do. 

"THE COURT: And you have been able to assist 
your counsel in your defense? 

"THE WITNESS: Yes, sir. 

"THE COURT: Has he given any indication of 
his inability to understand the proceedings, counsel, 

8. 



or to assist you in any way? 

"MR. MIRECKI: No. 

"May I ask him if he will waive the attorney 
and client privilege for a minute, your Honor? 

"THE COURT: Yes. 

"MR. MIERCKI: May I speak to the court about 
what we spoke of up in Mr. Shekoyan's office? 

"THE COURT: Yes? 

"MR. MIRECKI: I told the defendant that I 
didn't think that we should go to trial; in fact when I 
left the court here yesterday I spoke to Mr. Andrews 
and explained to him about Mr. Black and everything 
else, and the defendant insisted on going to trial. I 
stayed up last night trying to prepare for this case 
based on what he wanted. Now I realize the handicap 
I have been under, and I have been appointed, your 
Honor. 

"THE COURT: I understand that. 

"MR. MIRECKI: And he never told me about 
his disability. 

"THE COURT: My only point is whether or not 
at the present time there is some question concerning 
his mental competence, because if there is why I 
should have him examined by a psychiatrist. My 
only question to you is not what you have advised him 
to do, which I will disavow, but whether or not he has 

9. 



given any indication to you that he couldn't under- 
stand the proceedings and he has been able to tell 
you what he wanted about this case. 

"MR. MIRECKI: No. He has been in fact 
trying to call too many shots here. " [R. T. 118-120]. 

On September 18, 1967, the date originally set for sentenc- 
ing the appellant, the trial court ordered that the appellant be 
examined as to mental competency by a court -appointed psychia- 
trist [C. T. 22-23]. The initial report of the psychiatrist found: 
"The defendant is presently sane. He is able to understand the 
proceedings against him and is capable of assisting counsel in his 
own defense. He was legally sane at the time of the alleged acts' 
alleged commission, and was legally sane at the time of present 
examination." [C.T. 35]. Subsequently, the appellant's Veterans 
Administration Medical file, dating back to 1944, was reviewed by 
the court-appointed psychiatrist and he filed a supplemental 
report with the trial court stating: 

"After reading these records, the examiner 
is unconvinced that this defendant has ever suffered 
any form of mental illness which resulted either 
from his boxing or from his military service in which 
he had no combat duty. The defendant is, in my 
opinion, a clever manipulator. My diagnosis contin- 
ues as in the first report. " [C. T. 44]. 



10. 



On October 23, 1967, the two reports of the psychiatrist 
were admitted into evidence and the appellant was allowed to read 
a letter he had written for the court's attention [R. T. 133-136]. 
The court also indicated that it had read and considered prior 
letters addressed to the court by the appellant [R. T. 133]. The 
court further indicated that it had read the probation report and 
was considering it as well as the observation of the appellant 
during the trial and while he was on the witness stand [R. T. 137]. 

The appellant presented no other evidence at the time of 
the hearing. The appellant did not seek to raise mental incom- 
petency as a defense at the time of trial, but rather denied same. 



V 
ISSUE PRESENTED 



Was the trial court's determination of competency arbi- 
trary and unwarranted? 

VI 
ARGUMENT 

The only contention of appellant on appeal is that the trial 
court simply adopted the determination of the psychiatrist who 
examined the appellant as its conclusion that the appellant was 
mentally competent to understand the proceedings against him 
and to assist his counsel in his defense. 

11. 



This contention is clearly untenable as the facts of the case 
indicate. During the trial the appellant did not offer any evidence 
relating to his mental competency. Only after the appellant had 
finished his testimony did the court, on its own, question the appel- 
lant concerning his mental competency. Even then; both the defen- 
dant and his counsel affirmed that the appellant understood the 
proceedings, was able to assist his counsel, and was mentally 
competent. (The colloquy between the court and the appellant and 
his counsel is set forth in the Statement of Facts, hereinabove. ) 

Furthermore, on October 23, 1967, when a hearing on the 
psychiatric examination was held, and before the appellant was 
sentenced, the trial court stated that it was considering the psy- 
chiatric report, the probation report, the letters that the appellant 
had written to the court, the appearance and statements of the 
appellant on the witness stand during the trial, and the letter read 
to the court by the appellant, in concluding that the appellant was 
mentally competent and understood the proceedings at the time of 
trial [R. T. 137]. 

The appellant's contention that the court simply adopted 
the psychiatrist's findings is apparently based on the fact that the 
court reiterated the psychiatrist's conclusion that the appellant 
was a clever manipulator [R. T. 137, C. T. 44]. The appellant 
offered no evidence other than his statement to the court on 
October 23, 1967, concerning his mental competency. The record 
is clear that the court reviewed and considered all the evidence 
before it in reaching the conclusion that the appellant was mentally 

12. 



competent. 

Under Section 4244 of Title 18, United States Code, the 
duty and responsibility of determining whether a defendant who 
has a mental illness or defect is or is not competent to stand trial 
is that of the trial court and his determination in that regard can 
not be set aside on review unless clearly arbitrary or unwarranged. 
Dusky V. United States , 271 F. 2d 385, 397 (8th Cir. 
1959)s reversed on other grounds, 
362 U. S. 402. 
The facts are clear that the trial court's determination 
was neither arbitrary nor unwarranted. Mental competency was 
never raised as an issue in the proceedings. 

In proceedings under Title 18^ United States Code, 
Section 4244, if the psychiatrist's report finds the defendant com- 
petent, the matter may end there, for, so far as the statute is 
concerned, the trial court is not required to hold a hearing to 
determine the defendant's present competency even though the 
defendant may wish to contest the report's conclusion. 

Stone V. United States , 358 F. 2d 503, 506 

(9th Cir. 1966); 
Meador V. United States , 332 F. 2d 935, 936 

(9th Cir. 1964); 
Formhals v. United States, 278 F. 2d 43, 48 
(9th Cir. 1960). 
The appellant was found competent by the psychiatrist 
[C. T. 35, 44]. 

13. 



VII 
CONCLUSION 

For the reasons stated hereirip the judgment should be 
affirmed. 

Respectfully submitted, 

WM. MATTHEW BYRNE, JR. 

United States Attorney 

ROBERT L. BROSIO 

Assistant U. S„ Attorney 
Chief, Criminal Division 

JAMES E, SHEKOYAN 

Assistant U. S. Attorney 

Attorneys for Appellee 
United States of America 



14. 



CERTIFICATE 

I certify that, in connection with the preparation of this 
brief, I have examined Rules 18, 19 and 39 of the United States 
Court of Appeals for the Ninth Circuit, and that, in my opinion, 
the foregoing brief is in full compliance with those rules. 



I si James E. Shekoyan 

JAMES E. SHEKOYAN 



15. 



No. 22528 ^ 



IN THE UNITED STATES COURT OP APPEALS 
FOR THE NINTH CIRCUIT 



JAI^S G. RUSSELL, 

Appellant, 

V. 

PAUL H. NITZE, SECRETARY OP THE NAVY, 

Appellee. 



ON APPEAL FROM THE UNITED STATES DISTRICT 
COURT FOR THE DISTRICT OP IDAHO 



FILE 



BRIEF FOR APPELLEE 
JUL 8 1968 

EDWIN L. WEISL, Jr., 

Assistant Attorney General , 

SYLVAN A, JEPPESEN, 

United States Attorney , 

JOHN C. ELKIIDGE, 

ROBERT M. HEIER, 
Attorneys , 

Department of Justice , 
Washington, D.C. 2033O . 



INDEX 

Page 

"urisdictional statement i 

Statement of the case 2 

Itatutes and regulations involved 7 

rgument 

The district court correctly held that 

mandamus would not lie to compel appellee 

to change the character of appellant's discharge-- 12 

A. Judicial review of military administrative 
discharges is limited to insuring that the 
procedures and decisions of the military 
tribunal are permitted by law and is 
unavailable to oversee discretionary decisions 

of military tribunals or officials 12 

B. Since Russell's complaint sought nothing 
more than review of an exercise of discretion 
by the military, the district court correctly 
held that no cause of action was stated, 19 

Jonclusion 2^ 

Certificate 2H 

iffidavlt of service 25 



CITATIONS 

Jases: 

Alaska Smokeless Coal Co. v. Lane, 25O U.S. 5^9 15 

Ashe V. McNamara, 355 P. 2d 277 (C.A. l) 15 

Bland v. Connally, 293 P. 2d 852 (C.A.D.C.) 1^ 

Brancadora v. Federal National Mortgage Ass'n., 

3^4 F. 2d 933 (C.A. 9) 15 

Brown v. McNamara, 387 F. 2d I50 (C.A. 3) 20 

Burns v. Wilson, 3^6 U.S. 137 1^ 

Courtney v. Secretary of the Air Force, 267 F.Supp. 

305 (CD. Calif.) 1^,2^4 

De Gorter v. Federal Trade Commission, 2^4 F.2d 

270 (C.A. 9) 22 

Denby v. Berry, 263 U.S. 29 I6 



- 1 - 



Cases continued: Page; 

Dynes v. Hoover, 6l U.S. 65 13 

Edmunds v. Board of Examiners of Optometry, IO6 P. 2d 

90^ (C.A. 9) 16 

Pinley v. Chandler, 377 F. 2d 5^8 (C.A. 9), certiorari 
denied, 389 U.S. 869 I6 

Fowler V. Wilkinson, 353 U.S. 583 20 

Gentila v. Pace, 193 F. 2d 92^ (C.A.D.C.), certiorari 

denied, 3^2 U.S. 9^3 l^,l8 

Harmon v. Brucker, 355 U.S. 579 15 

Houston V. Ormes, 252 U.S. 469 15 

Ingalls V. Brown, 377 P. 2d 151 (C.A.D.C.) 20 

In re Griraley, 137 U.S. 14? 13 

In re Yamashita, 327 U.S. 1 13 

Johnson v. Sayre, I58 U.S. 109 13 

Mancilla v. United States, 382 P. 2d 269 (C.A. 9) I5 | 

I 
Marbury v. Madison, 1 Cr. 137 I6 j 

Michaelson v. Herren, 242 P. 2d 693 (C.A. 2) l4,l8 

Ness V. Fisher, 223 U.S. 683 I6 

Orloff V. Willoughby, 3^5 U.S. 83 13 

Pacific Gas & Electric Co. v. Securities and Exchange 
Commission, 139 F. 2d 298 (C.A. 9), affirmed, 324 U.S. 
826 22 

Panama Canal Co. v. Grace Line Inc., 356 U.S. 309 15 

Payson v. Pranke, 282 P. 2d 85I (C.A.D.C.) l4 

Prairie Band v. Udall, 355 F. 2d 364 (C.A. 10), 

certiorari denied, 385 U.S 83 lo 

Quackenbush v. United States, 177 U.S. 20 13 . 

Reaves v. Alnsworth, 219 U.S. 296 13 * 

- 11 - 



Cases continued: Page 

Reed v. Franke, 297 F. 2d 1? (C.A, 4) 1^ 

Riverside Oil Co. v. Hitchcock, I90 U.S. 31? I6 

Runkle v. United States, 122 U.S. 5^3 I6 

Rural Electrification Administration v. Northern States 
Power Co., 373 F. 2d 686 (C.A. 8), certiorari denied, 
387 U.S. 9^5 16 

Seebach v. Cullen, 338 F. 2d 663 (C.A. 9), certiorari 

denied, 38O U.S. 972 15 

United States ex rel. Cleary v. Weeks, 259 U.S. 336 17 

United States ex rel. French v. Weeks, 259 U.S. 326 13, I6 

United States v. Wilbur, 283 U.S. ^1^ 15 

Updegraff v. Talbott, 221 F. 2d 3^2 (C.A. H) I8 

Van Bourge v. Nitze, 388 F. 2d 5?7 (C.A.D.C.) 15 

White V. Administrator of General Services Administration 
3^3 F. 2d 4^4 (C.A. 9) I6 

Work V. United States ex rel. Rives, 267 U.S. 175 19 

Statutes and Regulations : 

Statutes : 

Legislative Reorganization Act of 19^6, 60 Stat. 

812, as amended 10 U.S.C. 1552 l8,22 

Servicemen's Readjustment Act of 1944, § 301, 

58 Stat. 286, as amended, 10 U.S.C. 1553 5,7,17,18 

10 U.S.C. 1553(a} 7 

10 U.S.C. 1553(b) 8 

10 U.S.C. 1553(c) 9 



iii - 



statutes continued: Page 

Uniform Code of Military Justice, as amended, 

10 U.S.C. 801 et seq. 2 

10 U.S.C. 831,"i:rt. 31 --- 3 

10 U.S.C. 876, Apt. 76 Ik 

10 U.S.C. 925, Art. 125 - 2 

10 U.S.C. 93^, Art. 13^ 2 

28 U.S.C. 1291 2 

28 U.S.C. 1361 — 8,15, 



Regulations; 

Bureau of Navy Personnel Manual: 



32 
32 
32 
32 
32 
32 
32 
32 
32 
32 
32 
32 
32 
32 
32 
32 
32 
32 
32 
32 
32 
32 
32 
32 



.p 


.R. 


.p 


.R. 


.p 


.R. 


.p 


.R. 


.F 


.R. 


.P 


.R. 


.F 


.R. 


.P 


.R. 


.F 


.R. 


.P 


.R. 


.P 


.R. 


.P 


.R. 


.P 


.R. 


.F 


.R. 


.P 


.R. 


.P 


.R. 


.F 


,R. 


.P 


,R. 


.P 


.R. 


.P 


,R. 


.F 


.R. 


.F 


.R. 


.F 


.R. 


.F 


,R. 



723. 
723. 

724. 
724. 
724. 
724. 
724. 
724. 
730. 
730. 
730. 
730. 
730. 
730. 
730. 
730. 
730. 
730. 
730. 
730. 
730. 
730. 
730. 
730. 



1 et seq 

3(cT "■ 

1 

2 ■ 

3 

5 

6 

17 

1 

2 

10 

10fa| - 
10(b) - 
12 

121 
121 
121 
121 
121 
121 
121 
121 
121 
121 



it! 



22 

22 

8 

9 

19 

9,19 

9 

20 

3 
? 

21 

9 

10 

3,21 

10 

10 

10 

10 

10 

11 

11 

11 

11 

11 



Miscellaneous: 



90 Cong. Rec. 3082 
90 Cong. Rec. 4333 
90 Cong. Rec. 4338 



18 
18 
18 



108 Cong. Rec. 20078 16 



Miscellaneous continued: Page 

Hearings Before House Committee on World War Veterans* 
Legislation (S. 1767) , 78th Cong., 2d Sess., pp. 11-12, 
40-^1 18 

H, Kept. No. I4l8, 78 th Cong., 2d Sess., 1944--- --- 18 

H. Kept. No. 491, 8lst Cong., 1st Sess., p. 35, -,- 1^^ 

2 Moore, Federal Practice , § 4.29 I6 

40 Op. Atty. Gen. 504 17, I8 

41 Op. Atty. Gen. 12 22 

S. Rept. No. 486, 8lst Cong., 1st Sess., p. 32 l4 

S, Rept. No. 1992, 87 Cong., 2d Sess., p. 2 I6 



- V - 



IN THE UNITED STATES COURT OP APPEALS 
FOR THE NINTH CIRCUIT 



No. 22S28 



JAMES G. RUSSELL, 

Appellant, 

V. 

PAUL H. NITZE, SECRETARY OP THE NAVY, 

Appellee. 



ON APPEAL PROM THE UNITED STATES DISTRICT 
COURT POR THE DISTRICT OF IDAHO 



BRIEF POR APPELLEE 

JURISDICTIONAL STATEMENT 

This action was instituted in the district court on 
June 12, 1967* by James Russell who had been discharged from 
the United States Navy for engaging in homosexual conduct. 
Russell, admitting that he engaged in the conduct, but asserting 
that the Navy Discharge Review Board abused its discretion in 
failing to change his discharge from undesirable to general 
or honorable, sought an order in the nature of a writ of 
mandamus directing the Secretary of the Navy to change his 
discharge from undesirable to honorable or general. He alleged 
that the district court had Jurisdiction under 28 U.S.C. I361. 
On October 27, 19^7, the district court granted summary Judgment 



for the Secretary on the ground that the complaint failed to 
state a claim under which relief could be granted (R. 101). 

Notice of appeal was filed on December 22, 1967 (R. IO5). 
This Court has Jurisdiction over the appeal pursuant to 
28 U.S.C. 1291. 

STATEMENT OF THE CASE 

A, The Pertinent Facts 

On October 30, I962, the appellant, James G. Russell, 
enlisted in the United States Navy for a term of four years 
(R, 12). After completion of the basic training program . 
prescribed for all recruits he was transferred to the United I 
States Naval Hospital in San Diego, California for specialized 
training (R. I6) . ■ 

In May I963, an investigation by the hospital's security 
office uncovered the possibility that Russell had engaged in 
homosexual conduct on Navy premises. Based upon information 
contained in the investigation report, Russell was called into 
the hospital's security office and informed that he was sus- 
pected of having engaged in homosexual conduct in violation 

of the Uniform Code of Military Justice, as amended, 10 U.S.C. 

1/ 
801 et^ seq . (R. ^l). At that time, pursuant to regulations 

he was informed of his right to remain silent and advised that 



1/ See, Art. 125 UCMJ, 10 U.S.C. 92? (sodomy); Art. 13^ UCMJ, 
To U.S.C. 934 (discreditable conduct). 

- 2 - 



2/ 
any statements he made could be used against him (R, hi). 

Nevertheless, Russell responded freely to questioning and 

admitted having engaged In a sodomous act with another enlisted 

man (R. 4l) , 

Subsequently, on June h, 1963, Russell executed a written 
statement In which he acknowledged that he had been Informed 
of his rights under the Uniform Code of Military Justice, that 
he understood that he was under no obligation to make any 
statement whatsoever regarding the offense, and that he knew he 
could not be compelled to answer any Incriminating questions. 
He also acknowledged that no force, coercion, threats, or 
promises had been used or made In order to Induce him to Issue 
a statement (R. 43). In the statement Russell again admitted 
to having engaged In homosexual activity. In sole explanation 
he stated that he had allowed his curiosity to affect his 
Judgment but that throughout, he had remained the passive 
partner (R. 44) . 

Sometime after the Issuance of this statement, Russell 

was Infomned that he was being considered for an administrative 

3/ 
discharge under other than honorable conditions. On June 12, 1963, 

2/ Bureau of Navy Personnel Manual, 32 C.P.R. 730.12; Cf., 
ffrt. 31 UCMJ, 10 U.S.C. 831. 

3/ Under current Navy Regulations, 32 C.P.R. 730.1 et seq., 
Fhere are five types of discharges. Three of them -- EHnorable, 
general and undesirable -- may be granted administratively, 
32 C.P.R. 730.2. Two of them -- bad conduct and dishonorable -- 
may be given only via court-martial. Id. 

- 3 - 



about one week after issuing his first statement, Russell 
signed another document in which he recorded his understandim 
that he was being considered for a discharge under other 1 
than honorable conditions (R, 51). He stated that he had beei 
afforded the opportunity to request, but was expressly waivini 
the following rights (R. 51): 

(a) to have his case heard by a board of not less 
than three officers 

(b) to appear in person before the board 

(c) to be represented by counsel. 

However, the right to issue a statement in his own behalf was' 

reserved and exercised, and on the same day, June 12, Russell 

issued a second statement (R, ^8-50). At the beginning of 

the statement, he acknowledged that (R. 48): 

I have been advised that I may be discharged 
under other than honorable conditions and the 
reasons therefor. I understand such discharge may 
deprive me of virtually all veterans' benefits 
based upon my current period of active service, 
and that I may expect to encounter substantial 
prejudices in civilian life in situations wherein 
the type of service rendered in any branch of the 
Armed Forces or the character of discharge received 
therefrom may have a bearing. 

After the foregoing, Russell again admitted freely that he 

had engaged in homosexual activity (R. 48-^1). j 

On June 17, I963, the Commanding Officer of the hospital 

forwarded the case to the Chief of Naval Personnel, accompani 

by his recommendation that Russell be given a general dischar 

for reasons of unfitness (R. 38). On July 1, a three member 



Dlscliarge Board, after considering the case, unanimously 
recommended that Russell be given an undesirable discharge 
by reason of unfitness (R, 36). This decision was approved 
by the Chief of Naval Personnel (R. 36) who, on July 1?, 
directed that Russell be granted an undesirable discharge by 
reason of unfitness. On July 29, I963, Russell was officially 
separated from the Navy on that basis (R, 26), 

B. Proceedings Before the Navy Discharge Review Board 
Three years later, on July 11, 1966, Russell applied to 

the Navy Discharge Review Board seeking to have the nature of 

V 
his administrative discharge altered (R. 77). At that time, 

Russell enclosed an additional statement with his application 

for review, again admitting having engaged in homosexual 

conduct and offering the excuse of "yo'^ithful indiscretion" 

(R. 78). In support of his application, he offered a psychological 

report and statements by certain prominent members of his 

community (R. 77). Although he waived a personal appearance 

(R. 77), he did exercise the right to be represented by counsel 

and, in fact, was represented not only by his present counsel, 

Mr. Hobdey, but by appointed counsel as well (See R. 70, 79). 

On August 12, 1966, Russell's appointed counsel requested 

that, in addition to a consideration of the record before the 

Kf The Navy Discharge Review Board is an administrative board 
authorized by 10 U.S.C, 1553* supra , with authority to 
correct or modify the nature of any discharge or dismissal 
in accordance with the facts presented to it. 



I 



Board, the following factors be examined: 

1. Russell's youth and immaturity, 

2. his small town background and limited exposure 
to homosexuals, and 

3. Russell's ignorance (R. 70). 
No additional testimony or evidence relating to the acts in 
question or circumstances of discharge was offered. 

By decision of August l6, 1966, the Navy Discharge Review 

Board determined that the character of the original discharge 

was proper, and that no correction or modification of the _ 

undesirable discharge was warranted. The Board stated (R. 68 

Petitioner voluntarily admitted participating 
in an act of sexual perversion while in the naval 
service. By so doing, petitioner thereby classified 
himself as unfit for the close association with 
members of the male sex necessitated by the require- 
ments of naval service. The Board concludes that 
the character of the discharge was proper. No 
evidence was adduced to Justify any change in 
Petitioner's discharge. 

This decision was approved by the Secretary of the Navy on 
September 19, 1966 (R. 68), and this action ensued. 

C. Proceedings in the District Court 
As noted, Russell filed his complaint on June 12, I967 
(R.l), alleging that the Discharge Review Board's refusal 
to change the nature of the discharge was arbitrary and capri< 
and seeking mandamus to compel the Secretary to issue an 
honorable or general discharge. On October 6, the Secretary 
moved for summary Judgment upon the grounds of lack of 



In his response Russell asserted that. In view of his youth 
and lack of wisdom, the Navy Discharge Review Board had been 
arbitrary in refusing to amend the character of his discharge 
(R. 93, 98). Russell also contended, for the very first time, 
that after being advised that his commanding officer was 
recommending a general discharge, he decided to waive the right 
to counsel (R. 98). No supporting affidavits were offered. 

On October 27, I967, the district court entered summary 
Judgment for the Secretary. In its memorandum opinion the 
court, noting that all administrative proceedings were conducted 
in full conformity with controlling administrative regulations 
(R. 102), held that the determination of the nature of a dis- 
charge from the armed services is a discretionary activity 
of the Secretary and, hence, not subject to control by 
mandamus. Accordingly, the complaint was dismissed for failure 
to state a cause of action (R. 103). This appeal followed 
(R. 105). 

STATUTES AND flEGULATIONS INVOLVED 

§ 301 of the Servicemen's Readjustment Act of 19^^, 

58 Stat. 286, as amended, 10 U.S.C. 1'353, provides: 

1553. Review of discharge or dismissal 

(a) The Secretary concerned shall, after 
consulting the Administrator of Veterans' Affairs, 
establish a board of review, consisting of five 
members, to review the discharge or dismissal 
(other than a discharge or dismissal by sentence 
of a general court-martial) of any former member 
of an armed force under the Jurisdiction of his 



department upon its own motion or upon the 
request of the former member or. If he is 
dead, his surviving spouse, next of kin, 
or legal representative. A motion or request 
for review must be made within IS years after 
the date of the discharge or dismissal. 

(b) A board established under this 
section may, subject to review by the Secretary 
concerned, change a discharge or dismissal, 

or issue a new discharge, to reflect its 
findings. 

(c) A review by a board established 
under this section shall be based on the 
records of the armed forces concerned and such 
other evidence as may be presented to the board. 
A witness may present evidence to the board in 
person or by affidavit. A person who requests 

a review under this section may appear before 
the board in person or by counsel or an 
accredited representative of an organization 
recognized by the Administrator of Veterans' 
Affairs under chapter R9 of title 38. 

28 U.S.C. 1361 provides: 

Action to compel an officer of the United 
States to perform his duty 

The district courts shall have original 
Jurisdiction of any action in the nature of 
mandamus to compel an officer or employee of 
the United States or any agency thereof to 
perform a duty owed to the plaintiff. 

The Bureau of Navy Personnel Manual, reprinted in the 

Code of Federal Regulations, provides in pertinent part: 

32 C.F.R. 724.1 Authority 

A board for the review of discharges 
and dismissals of former personnel of the Navy 
and Marine Corps is established by the Secretary 
of the Navy pursuant to Title 10, United States 
Code, section 15S3. To carry out the duties imposed 
by section 15^3, administrative regulations and 
procedures are formulated in this part. 

- 8 - 



32 C.P.R. 72^.2 Jurisdiction. 

(a) In accordance with the precept 
of the Secretary of the Navy, the Navy 
Discharge Review Board, has been estab- 
lished within the Department of the Navy . . . . 

* * « 

32 C.P.R. 724.5 Methods of presenting case. 
The petitioner may present his case: 

(a) By affidavit and/or other documents. 
(See § 724, 15(e) (3).) 

(b) In person, with or without counsel. 

(c) By counsel. 

(d) Or by a combination of the above. 

32 C.P.R. 724.6. Counsel. 

As used in this part, the term "counsel" 
will be construed to include members in good 
standing of a Pederal Bar or the Bar of any 
State, accredited representatives of Veterans 
organizations recognized by the Administrator 
of Veterans* Affairs under Title 38, United 
States Code, section 3402, and such other persons 
as, in the opinion of the Board, are considered 
to be competent to present equitably and com- 
prehensively the request of the applicant for 
review, unless barred by law. 

32 C.P.R. 730.10. Discharge of enlisted personnel 

by reason of unsuitability . 

(a) Members may be separated, by reason of 
unsuitability, with an honorable or general 
discharge as warranted by their military records. 
A discharge by reason of unsuitability in accordance 
with the provisions of this section, regardless of 
the attendant circumstances, will be effected only 
when directed by or authorized by the Chief of 
Naval Personnel . 

- 9 - 



(b) Members may be discharged by reason 
of unsultabillty because of: 



(7) Homosexual or other aberrant tendencies. 

32 C.P.R. 730.12 Discharge of enlisted personnel 

by reason of unfitness. 

(a) Members may be separated by reason of 
unfitness with an undesirable discharge, or with 
a more creditable type discharge when it is 
warranted by the particular circumstances in a 
given case. A discharge by reason of unfitness 
regardless of the attendant circumstances, will be 
effected only when authorized by the Chief of 
Naval Personnel . 

(b) Members whose military records are 
characterized by one or more of the following 
may be recommended for discharge by reason of 
unfitness: 



(5) Homosexual acts. (SECNAV Instruction 
1900.9 series sets forth controlling policy 
and additional action required in cases 
Involving homosexuality.) 

(6) Other sexual perversion including 
but not limited to (l) lewd and lascivious 
acts, (11) sodomy, (ill) Indecent exposure, 
(iv) Indecent acts with or assault upon a 
child, or (v) other indecent acts or offenses. 



(d) In each case processed in accordance 
with this section, the individual is subject 
to an undesirable discharge. The member must 
be informed in writing as to the circumstances 
which are the basis for the contemplated action 
and must be afforded an opportunity to request 
or waive in writing any or all of the following 



- 10 - 



privileges: (if not on active duty, this 
may be accomplished by registered mail.) 

(1) To have his case heard by a board 
of not less than three officers. 

(2) To appear in person before such 
board (unless in civil confinement or other- 
wise unavailable) , 

(3) To be represented by counsel. 

(^) To submit statements in his own behalf. 

(5) To waive in writing the rights listed 
in subparagraphs (l) to (h) of this paragraph. 

Prior to declaring his intentions concerning the 
rights listed in this paragraph (and prior 
to requesting a discharge to escape trial by 
court-martial in cases processed under paragraph 
(b)(5) of this section the member shall be afforded 
the opportunity to consult with counsel. If the 
individual requests that his case be heard by a 
board of officers, the commanding officer shall 
convene a board in accordance with § 730. 1?. 
In the event the individual refuses to request 
or waive his privileges, make a page 13 entry 
of explanation in the individual's service 
record and forward a copy of the page 13 along 
with other enclosures to the Chief of Naval 
Personnel. 



- 11 - 



ARGUMENT 

THE DISTRICT COURT CORRECTLY HELD THAT 

MAITDAMUS WOULD NOT LIE TO COMPEL APPELLEE 

TO CHANGE THE CHARACTER OF APPELLANT'S DISCHARGE 



Russell's main contention in this Court is that the Navy 
Discharge Review Board's refusal to change his discharge from 
undesirable to general is arbitrary and capricious because ■ 
the Board refused to consider his youth and lack of wisdom, I 
and ignored a psychological report suggesting that Russell is 
not a homosexual. It is also asserted that, at the time of I 
his discharge, Russell waived the right to counsel after being 
informed that his Commanding Officer was recommending a genera 
discharge. Based on these considerations, it is urged, the 
district court erred in declining to compel the Secretary of 
the Navy to issue a general — or honorable — discharge. j 

We show below that the district court, under traditional 
principles of Judicial review of decisions of military trlbuna 
correctly held that mandamus would not lie in this case. 1 

A, Judicial Review of Military Administrative 
Discharges Is Limited to Insuring That the 
Procedures and Decisions of the Military 
Tribunal Are Permitted By Law And Is 



Unavailable to Oversee Discretionary Decisions 
of Military Tribunals or Officials. 



( 



It is well settled that the Judiciary will not normally 
interfere with military decisions made in pursuit of legitimat 
military goals. This principle was set forth by Mr. Justice J 



In Orloff V. Wllloughby , 3^5 U.S. 83, as follows: 

• . . judges are not given the task of running 
the Army. ♦ ♦ * [0]rderly government requires that the 
Judiciary be as scrupulous not to interfere with legitimate 
Army matters as the Army must be scrupulous not to inter- 
vene in Judicial matters. 3^5 U.S. 83, 93-9^. 

Obviously, this refusal to oversee military matters flows 
from a keen awareness that Judicial intervention in the internal 
affairs of the military could seriously undermine the high level 
of discipline and morale that are so indispensable to the 
5fficient functioning of our armed forces. The Supreme Court, 
cecognizing this, has held that -- subject to extremely limited 
exceptions — decisions of duly constituted military tribunals 
nay not be Judicially reviewed. See, Quackenbush v. United 
States , 177 U.S. 20. The first exception is that the federal 
3ourts may inquire into the Jurisdiction of the military tribunal 
bo render the decision in question. In re Yamashita , 327 U.S. 1; 
In re Grimley , 137 U.S. 1^7; Dynes v. Hoover , 61 U.S. 65. And 
second, the courts may examine the decisions reached, as well 
is the procedures employed, to insure their permissibility 
under law. See Reaves v. Ainsworth , 219 U.S. 296; Johnson v. 
Sayre , I58 U.S. I09. But having determined that there are no 
jefects as to Jurisdiction and procedure, and that the action 
baken is permitted by law. Judicial review is at an end. United 
States ex rel, French v. Weeks, 259 U.S. 326; Johnson v. Sayre , supra 



- 13 - 



That these principles apply with equal vitality in the ar< 

of administrative discharges cannot be doubted. Reed v, Frank( 

297 P. 2d 17, 20 (C.A. 4); Courtney v. Secretary of the Air 

Force, 267 F. Supp. 305, 311 (C.D. Calif.). See, Pay son v. ■ 

Franke, 282 F. 2d 85I, 85^ (C.A.D.C.); cf ., Michaelson v. Herr< 

242 F. 2d 693, 696 (C.A. 2; concurring opinion of Judge Medina 

Gentila v. Pace , 193 F. 2d 924 (C.A.D.C.), certiorari denied 

"~57 
342 U.S. 943. As stated in Reed , supra , 297 P. 2d at 20: 

The [legality] of the discharge procedure 
is a Justiciable issue but once the plaintiff's 
claim is found and declared to be without merit, 
the discharge procedure may continue as before. 
Here, . . . there is no direct Judicial review 
of the administrative proceedings except insofar 
as necessary to determine the legality of pre- 
scribed administrative procedure . It is the 
basic procedure . . . which may be reviewed. 
(Court's emphasis.) 

Moreover, considering the requirements of discipline, mon 
and efficiency in the armed services, the scope of Judicial 
review of military discharges should certainly be no greater (j 
as great) than the scope of Judicial review of federal employi 
civilian discharges. And, with respect to the latter, this 
Court has consistently held that Judicial review is limited tc 

5/ Indeed it is apparent that some decisions of military tri- 
^una33 are completely unreviewable. Thus, under Article 76, 
Uniform Code of Military Justice, 10 U.S.C. 876, court-martial 1 
convictions may not be reviewed at all except by way of con- 
stitutionally guaranteed habeas corpus proceedings. H.Rept. 
No. 491, 8lst Cong., 1st Sess., p. 35; S. Rept . No. 486, 8lst 
Cong., 1st Sess., p, 32. Yet, even in such proceedings, whei 
life and liberty are at stake, the scope of review is exceedirl^ 
narrow. Burns v. Wilson , 346 U.S. 137. 

- 14 - 



determining whether applicable statutes and procedures have 

been complied with. See, e.g^., Mancilla v. United States , 

382 P. 2d 269 (C.A. 9); Brancadora v. Federal National Mortgage 

As3*n. , 3^4 F. 2d 933 (C.A. 9); Seebach v. Cullen , 338 P. 2d 663 

(C.A. 9), certiorari denied, 38O U.S. 972. Since the scope 

of review is limited in those cases, we submit that, a fortiori , 

it is so limited when reviewing decisions concerning military 

6/ 
personnel. 

Nevertheless, despite the foregoing, appellant insists 
that 28 U.S.C. 1361, granting mandamus Jurisdiction to all 
district courts, authorized the lower court to compel the 
Secretary to issue a more favorable discharge. This contention 
is completely devoid of merit. 

It is clear that mandamus will issue only to compel the 
performance of ministerial acts. It will not lie to control 
an exercise of discretion by the executive branch of the Govern- 
ment. Panama Canal Co. v. Grace Line Inc. , 356 U.S. 309; 
United States v. Wilbur , 283 U.S. ^l4; Houston v. Ormes , 252 
U.S. 469; Alaska Smokeless Coal Co. , v. Lane, 250 U.S. 5^9; 

6/ Ashe V . McNamara , 355 P. 2d 277 (C.A. l), cited by appellant 
Ts fully consistent with these principles. In that case, the 
decision of the military tribunal was overturned because reached 
by procedures not permitted by law. Other instances in which 
the procedures utilized by the military have been found defective 
include H armon v. Brucker , 355 U.S. 579; Van Bourge v. Nitze , 
588 P. 2d 5^7 (C.A.D.C.) and Bland v. Connally , 2^3 P. ^a~B52 
(C.A.D.C). But in each of the latter cases, the courts, having 
performed their assigned task of inquiring into the propriety 
of the procedures used, took no action on the merits but, 
remanded the case to the military for disposition under valid 
procedures. 

- 15 - 



Ness V. Fisher, 223 U.S. 683; Riverside Oil Co. v. Hitchcock, 
^ 

190 U.S. 317; Marbury v. Madison , 1 Cr, 137." 

This rule is equally applicable to military administratis 
boards whose decisions are discretionary in nature. Denby v. 
Berry , 263 U.S. 29; see, Runkle v. United States , 122 U.S. 54; 
Thus, in United States ex rel. French v. Weeks , 259 U.S. 326, | 
a former soldier sought mandamus to compel an Army classifical 
board to change the nature of his discharge classification. ] 

i 

holding that federal courts lacked the authority to compel 

7/ This Court has been called upon many times to apply these 
principles. See, e.g. , Finley v. Chandler , 377 F. 2d 5^8 
(C.A, 9), certiorari denied, 3«9 U.S. «b9; Edmunds v. Board oi 
Examiners of Optometry, IO6 F. 2d 904 (C.A."^T: 

Nor does 28 U.S.C. 136I change this result. Prior to 19( 
mandamus actions against Government officials were capable of 
being brought only in the District of Columbia. In order to 
allow such actions to be instituted throughout the rest of th< 
country as well. Congress passed § 1361 as a venue provision 
giving all district courts mandamus Jurisdiction. See, 2 Mooi 
Federal Practice , § 4.29. But in so doing. Congress made it 
plain that "This legislation does not create new liability or 
new causes of action against the United States government." 
S.Rept. No. 1992, 87 Cong. 2d Sess., p. 2. See, 108 Cong. ■ 
Rec. 20078. Thus, it is plain that the scope of mandamus " 
relief theretofore existing, as well as the principles 
governing its issuance, remained unchanged by the new section, 
White V. Administrator of General Services Administration , 
543 P. 2d 444 (C.A. ^); Rural Electrification AdministraFlon y 
Northern States Power Co ., 373 F. 2d bbb (C.A. 15), certiorari 
denied, 3B7 U.S. ^4^; Prairie Band v. Udall , 355 F. 2d 364 (C, 
10), certiorari denied, 3«5 U.S. ^3- 



- 16 - 



such an act the Supreme Court stated: 

Thus we have lawfully constituted military 
tribunals . . . and action by them within the 
scope of the power with which they are invested 
by law. It is settled beyond controversy that 
under such conditions decisions by military 
tribunals constituted Fy act of Congress, cannot 
b e reviewed or set aside by civil courts in a 
mandamus proceeding or otherwise. (Emphasis added . ) 
259 V.S. 535. 

See also. United States ex rel. Creary v . Weeks , 259 U.S. 336. 

We think it significant, moreover, that such holdings are 
entirely consonant with Congress' intent that, at least where 
applicable procedures have been followed, the Navy Discharge 
Review Board be permitted to exercise a broad discretion not 
subject to Judicial control. 

Prior to 19^4 an aggrieved member of the military, seeking 
to have the nature of his military discharge amended, had no 
recourse other than to private act of Congress. See, hO Op. 
Atty. Gen. 504. At that time, the Congressional prerogative 
to grant or withhold clemency was not subject to review by the 
courts but, of course, was final. 

In 19^4 > in order to shift the burden of considering the 
growing number of applications for review of discharges from 
it to the military. Congress passed § 301 of the Servicemen's 
Readjustment Act of 19^^, 58 Stat. 284, 286, as amended, 10 
U.S.C, 1553i setting up military discharge review boards such 
as the Navy Board in this case. In establishing this procedure. 
Judicial review from the decisions of the boards was not provided 
for. Indeed, presumably to insure that the final prerogative 

- 17 - 



I 

In such matters would be transferred exclusively to the mllit 

Congress amended its original bill to provide expressly that 

the findings of these boards were to be final subject only to 

review by the Secretary. 58 Stat. 286. The net result, as 

seen by the Attorney General, was that: 

The correction of the record and the 
issuance of a new discharge [by the military] 
may be regarded as acts of clemency, or in 
mitigation, precisely comparable in effect to 
a successful appeal to the Congress for relief 2/ 
by private act. 40 Op. Atty. Gen. 504, supra . 

Consequently, review of military discharges was transformed 
from a legislative into an executive — not a Judicial — fui 

8/ See H.Rept. No. l4l8, 78th Cong., 2d Sess (19^4); 90 Coni 
Rec. 3082; 90 Cong. Rec. 4333. In 19^2, § I553 was reenactei 
without substantive change. 76 Stat. 509. Cf. Michaelson ' 
Herren, 242 F. 2d 693 (C.A. 2); Updegraff v. Talbott , 221 F. 
342 (C.A. 4); Gentila v. Pace, 193 P. 2^ 924 (C.A.D^C. ), supr 

9/ See, Hearings Before the House Committee on World War Vei 
Legislation (S. 1767), 78th Cong., 2d Sess. pp. 11-12, 40-4l 
In 90 Cong. Rec. 4538, appears the following statement by Rej 
McCormack, a member of the Committee: 

We felt some machinery should exist in I 

the Navy Department and the War Department I 

whereby veterans could have a review without 1 
the necessity of having their discharges cor- 
rected by specific acts of Congress. I con- 
sider this provision a powerful contribution 
in the right direction. 

10/ Two years later Congress completed the task begun in 194' 
by enacting the Legislative Reorganization Act of 1946, 60 
Stat. 812. Under § 207 of the Act, 60 Stat. 8l2, 837, board; 
for the correction of military records were established as 
further avenues of recourse within the military. By § 131, 
60 Stat. 812, 831 Congress, evidently pleased with the resul' 
achieved under the new military boards, completely ended its 
former practice of itself reviewing applications for changes 
of discharge. The current version of that enactment appears 
in 10 U.S.C. 1552. 



Thus, the holdings of the courts and the mandate of 
Congress compel the same conclusion -- that the prerogatives 
which had formerly been committed solely and exclusively to 
Congress have been transferred intact to the military and 

(barring determinations or procedures unauthorized by law) 

11/ 
remain beyond control by the Judiciary. 

B. Since Russell* s Complaint Sought Nothing 

More Than Review of An Exercise of Discretion 
By the Military, the District Court Correctly 
Held That No Cause of Action Was Stated. 

In light of the foregoing, it is clear that the district 
court could not have granted the relief requested. Appellant 
makes no claim that the Discharge Review Board failed to afford 
him any procedures or rights to which he was entitled. Indeed, 
it is clear that he was granted all the procedural rights set 
forth in the Bureau of Naval Personnel Manual. Thus, he submitted 
supplementary statements along with his application for review. 
32 C.P.R, 724.3. He was granted, but waived, a personal 
appearance (R. 77). 32 C.F.R. 724.5. However, he did elect 
to retain counsel and was represented simultaneously by two 
separate attorneys at the time of the Board proceedings. 

11/ Appellant asserts that since military regulations 
prescribe the exact nature of the discharge to be granted, 
under any particular situation, the decision of the Board, 
having to conform to those regulations, is not discretionary 
but ministerial. This contention was rejected in Work v. 
United States ex rel. Rives , 267 U.S. 175, 177, where the Supreme 
Court expressly noted that an act is no less discretionary 
Just because the discretion must be exercised within limits. 

- 19 - 



Nor is there any claim that the Board procedures were otherwise 

outside the scope of constitutional, statutory or departmental 

authority in any way. 

Nevertheless, appellant's principal contention here is 

that the decision itself of the Discharge Review Board was 

arbitrary because it failed, despite his youth and lack of 

wisdom, to upgrade the character of his discharge. But it is 

perfectly evident that, in this regard, appellant is really 

asking the courts to oversee the Board's exercise of discretior 

Of course, in light of the principles discussed, the district 

court properly declined to consider this matter. Brown v. McNa 

387 P. 2d 150 (C.A. 3); Ingalls v. Brown, 377 F. 2d I5I (C.A.D.C 

As stated in Fowler v. Wilkinson , 353 U.S. 583, 584: 

If there is injustice in the [sanction] 
imposed it is for the Executive to correct, 
for since the board of review has authority 
to act, we have no Jurisdiction to interfere 
with the exercise of its discretion. That 
power is placed by Congress in the hands of 
those entrusted with the administration of 
military Justice or If clemency is in order , 
the Executive . (Emphasis supplied.) 

It is also suggested by appellant that, if homosexuality 
was the basis for the discharge, the Discharge Review Board was 
required to record its finding that he was in fact a homosexual 
(Br. 7). See 32 C.F.R. 724.17. In this connection, it is also 
alleged that the Board improperly disregarded a psychological 
report stating that Russell was not a homosexual. 



However, It is clear that Russell was charged and dismissed 
for engaging in a homosexual act, not for being a homosexual. 
The Bureau of Naval Personnel Manual clearly distinguishes 
between the two. Thus, if a member of the armed forces is 
found to be homosexual or to have such tendencies, he may be 
granted an honorable or general discharge by reason of unsuit- 
ability. 32 C.F.R. 730.10. However, once he has actually 
committed a proscribed act, thereby violating the Uniform Code 
of Military Justice, he is subject to being separated as 
undesirable by reason of unfitness. 32 C.F.R. 730.12. 

Appellant does not suggest, as he cannot, that this 
distinction is unreasonable or that it serves no valid military 
purpose. Certainly, therefore, since commission of a homosexual 
act was the basis for the discharge, the Discharge Review Board 
was not required to enter a finding regarding homosexuality, 
but only one that a homosexual act had been committed. This 
it clearly did (R. 68). 

The psychologist's report, which was allegedly disregarded 
by the Board, did not negate the fact that Russell actually 
had committed a proscribed act. Its materiality related to 
the matter of clemency only. Here, there is no evidence that, 
in deciding whether or not clemency was appropriate, the 
Board failed to consider the report -~ whose weight was a 
question for it, not for the court. 

- 21 - 



Finally, it is urged that there was some procedural 
irregularity connected with Russell's waiver of the right 
to counsel at the time of his discharge. We note initially 
that Russell had ample opportunity to raise this issue 
before the Discharge Review Board at which time he was 
represented, not only by his present counsel, but by service 
counsel as well. Since he failed to raise this issue then, 
he may not be heard to rely on it now. De Gorter v. Federal i 
Trade Commission, 2^4 F. 2d 270 (C.A. 9); Pacific Gas & Electr 
Co. V. Securities and Exchange Commission, 13^ F. 2d 298 (C.A. 

— 1^7 

affirmed, 324 U.S. 826. 

In any event, it is clear that at the time of his dischar 
Russell was meticulously advised of his right to counsel and t 
he knowingly and voluntarily waived it. He alleges no specif i 
facts contradicting this. 

After Russell was apprised of the charges against him, hi 
Commanding Officer told him that he (the Commanding Officer) 
would recommend Russell for a general discharge. Subsequently 
Russell voluntarily waived the right to counsel. There is no 
suggestion or allegation that the Commanding Officer told 

12/ Even at this late date appellant has additional recourse 
BFfore the Board for the Correction of Naval Records. See, 
§ 207, Legislative Reorganization Act of 19^6, 60 Stat. 8l2, 
837, as amended, 10 U.S.C. 1552; 32 C.F.R. 723.1, et seq. 
This Board, composed entirely of civilians, as compared with 
the military personnel of the Discharge Review Board, has 
plenary authority to grant relief even where the Discharge 
Review Board has denied similar relief. 4l Op. Atty. Gen. 12; 
see 32 C.F.R. 723.3(c). Thus the issue of waiver validly may 
be presented to the military for its initial consideration. 



Russell of the proposed recommendation in order to Induce him 

13/ 
to waive counsel . Nor is there any evidence that Russell 

failed to understand that his Commanding Officer's recommendation 

was nothing more than advisory and not binding upon the Discharge 

Board. Indeed it is certain Russell must have understood that 

his discharge might be not general, but something else because, 

on June 12, he issued a statement recording his understanding 

that he was being considered for a discharge under other than 

honorable conditions (R, Si). In another statement issued 

the same day, Russell stated that he had been advised that he 

might be discharged under other than honorable conditions and 

that that discharge could lead him to encounter substantial 

prejudice in civilian life. In no case did he ever specify 

that it was his impression that he would be given a general 

discharge. 

Under these circumstances, it cannot be said that the Navy 

Discharge Review Board abused its discretion in declining to 

upgrade the nature of Russell's discharge. Nor can it be said 

that Russell who, to this very day, admits to having engaged in 

a homosexual act while in the Navy, was deprived of his right to 

elect to retain counsel. Rather, it is plain that Russell, 

regretting his conduct and with full knowledge of the possible 

13/ The Commanding Officer did in fact recommend a general 
3Tscharge but the Discharge Review Board determined upon an 
undesirable discharge (R. 38 ). 



- 23 - 



consequences, voluntarily waived this right. He cannot claim 
otherwise now. Courtney v. r>ecretary o f the Air Force , supra 

CONCLUSION 

For the foregoing reasons, the judgment of the district 

court should be affirmed. 

Respectfully submitted, 

EDWIN L. WEISL, Jr. 

Assistant Attorney General , 

SYLVAN A. JEPPESEN, 

United States Attorney , 

JOHN C. ELDRIDGE, 

ROBERT M. HEIER, 
Attorneys, 

De partment of Justice , 
Washington, D.C. "??T'30 . 

.TULY 1968. 

CERTIFICATE ^ 

I certify that, in connection with the preparation of this 

brief, I have examined Rules 18, 19, and 39 of the United Stat« 

Court of AppeaQs for the Ninth Circuit, and that, in my opinion; 

the foregoing brief is in full compliance with those rules. 






- 24 - 



AFFIDAVIT OF SERVICE 
DISTRICT OF COLUMBIA ) 



ss. 



CITY OF WASHINGTON 



ROBERT M. HEIER, being duly sworn, deposes and says: 
That on July 5, 1968, he caused three copies of the 
foregoing brief for appellee to be served by air mail, 
postage prepaid, upon counsel for appellant: 



Cecil D, Hobdey, Esquire 
James, Hobdey & Shaw 
Box 176 
Gooding, Idaho 

/ 




Attorney, 

Department of Justice, 

Washington, D.C. 20530 



Subscribed and sworn to before 
me this 5th day of July 1968. 



[SEAL] 



HbTARY' TTOLTC 



-U 



My Commission expires April l4, 1972. 

- 25 - 



UNITED STATES COURT OF APPEALS 
FOR THE NINTH CIRCUIT 



CHARLES 


W. 


DENNIS , 












Petitioner 


and 


Appellant, ) 




vs 










THE 
et , 


PEOPLE 


: OF THE STATE ( 


DF CALIFORNIA, ) 








Respondent 


and 


Appellee. ) 



No. 22534 



APPELLEE'S BRIEF 



THOMAS C. LYNCH, Attorney General 
of the State of California 

ALBERT W. HARRIS, JR. 

Assistant Attorney General 

ROBERT R. GRANUCCI 

Deputy Attorney General 

6000 State Building 

San Francisco, California 94102 

Telephone: 557-1959 

Attorneys for Respondent-Appellee 



FILED 

JUL 101968 



.\/\ih,A u 



i 



TOPICAL INDEX 

Page 

JURISDICTION 1 

STATEMENT OF THE CASE 1 

STATEMENT OF FACTS 4 

APPELLANT'S CONTENTIONS 6 

SUMMARY OF RESPONDENT'S ARGUMENT 6 

ARGUMENT 

APPELLANT'S PETITION DID NOT STATE GROUNDS 

FOR RELIEF ON HABEAS CORPUS 6 

CONCLUSION 10 

CERTIFICATE OF COUNSEL 11 

TABLE OF CASES 

Briley v. Wilson 

T76 F.2d 802 (9th Cir. 1967) 7 

Gilmore v. People of the State of California 

364 F.2d 916 (9th Cir. 1966) 8 

In re Swain 

34 Cal.2cl 300 (1949) 7 

Pate V. Robinson 

3F3 U.S. 375 (1966) 9 



UNITED STATES COURT OF APPEALS 
FOR THE NINTH CIRCUIT 



CHARLES 


W. 


DENNIS, 












Petitioner 


and 


Appellant, ) 




vs 










THE PEOPLE OF THE STATE ( 
et al. , 


3F CALIFORNIA, ) 








Respondent 


and 


Appellee. ) 



No. 22534 



APPELLEE'S BRIEF 



JURISDICTION 



Appellant, seeking review of an order of the 

District Court denying his petition for a writ of habeas 

1/ 
corpus, invokes the jurisdiction of this Court under 

Title 28, United States Code section 2253. 

STATEMENT OF THE CASE 
A. Proceedings in the State Courts . 

On July 13, 1960, appellant Charles William Dennis 
was charged with a series of heinous crimes, i.e . , assault 
with intent to commit murder (Cal, Pen. Code § 217), kidnap- 
ping with bodily harm (Cal. Pen. Code § 209) , first degree 
robbery (Cal. Pen. Code § 211) , and forcible rape (Cal. Pen. 
Code § 261, subd. 3), by indictment filed in the Superior 
Court of Riverside County. Upon arraignment appellant 



1. A copy of this order is attached hereto as Appendix 



entered pleas of not guilty and not guilty by reason of 
insanity and, on September 21, 1960, he was committed to 

Patton State Hospital pursuant to sections 1368 and 1370 of 

2/ 
the California Penal Code (TR 40) . 

On September 12, 196 2, a bench warrant was issued 
by the superior court containing a certification by the 
superintendent of the Patton State Hospital that appellant 
was competent to stand trial and that he had left the hospital 
without permission. The certificate suggested appellant's 
return to the custody of the court (TR 40) . 

Appellant was eventually apprehended in Florida and 
was brought before the court for arraignment on September 24, 
1962, at which time the public defender was appointed to 
represent him (TR 40) . 

On September 28, 1962, appellant, represented by 
the public defender, withdrew his former pleas and entered a 
plea of guilty to the charges under section 1192,3 of the 
California Penal Code. Appellant waived time for sentence 



2. These sections empower the trial court, in case of 
doubt as to a defendant's competency to stand trial, to try 
and determine the issue of his present sanity and if the 
defendant is found insane, to commit him to the state hospital 
for treatment until he is restored to competency. 

3. That section provides as follows: 

"Upon a plea of guilty to an information or indictment 
for which the jury has, on a plea of not guilty, the power to 
recommend, the discretion of imposing, or the option to 
impose a certain punishment, the plea may specify the punish- 
ment to the same extent as it may be specified by the jury on 
a plea of not guilty. Where such plea is accepted by the 
prosecuting attorney in open court and is approved by the 
court, the defendant cannot be sentenced to a punishment more 



and was committed to prison that day (TR 40, ^^-1^7). 

Appellant did not appeal; his application to the 
California Supreme Court for a writ of habeas corpus was 
denied on October 13, 1965 (TR 6=7). 
B. Proceedings in the Federal Courts . 

On March 2, 1966, appellant filed a petition for a 
writ of habeas corpus in the court below (TR 1) . That same 
day an order to show cause was issued (TR 33) . 

Appellees, respondents below, on March 25, 1966, 
filed a return to the order to show cause (TR 38) . Appellant 
filed a traverse on April 13, 1966 (TR 53), 

On December 16, 1966, the District Court filed a 
memorandum and order directing appellant to supply the court 
with additional facts bearing on his allegation that his plea 
of guilty was involuntary (TR 89) . In the same order appel- 
lees were directed to supply the court with transcripts of 
all judicial proceedings relating to appellant and all 
medical reports bearing on his mental condition. A copy of 
this order is appended to this brief as Appendix B. On 
March 2, 1967, appellees filed the requested documents. 

On October 10, 1967, the District Court filed an 
order and opinion denying appellant's application for a writ 
of habeas corpus, discharging the order to show cause, and 
dismissing the proceedings (TR 125) . By order dated 



4. A copy of the transcript of the state proceedings at 
which appellant entered his plea is appended hereto as 
Appendix C . 



November 3, 1967, his petition for rehearing was denied, how- 
ever, he was granted until December 10, 1967, to file a 
notice of appeal (TR 158) . 

On January 15, 1968, appellant's notice of appeal 
was filed and that same day the District Court certified that 
there was probable cause to appeal and granted appellant's 
motion for leave to proceed in forma pauperis (TR 162-163) . 

STATEMENT OF FACTS 
This case involves the collateral review of a con- 
viction entered on appellant's plea of guilty. The procedural 
history of the case has been recited above, and since the 
District Court concluded that an evidentiary hearing was not 
warranted the precise question presented on appeal is whether 
petitioner's factual allegations, considered in the light of 
the state court records, stated grounds for relief on habeas 
corpus. These allegations were fairly summarized in the 
opinion of the District Court from which we quote as follows: 
"Petitioner contends (1) that he was 
adequately represented by counsel, and (2) that 
his pleas of guilty to the above charges were 
involuntary, alleging in substance and effect that 
he was mistreated by officials after his arrest in 
July, 1960 and during his stay at Patton State 
Hospital; that after his return to court from 
Florida, his court-appointed counsel visited him 
for the first and only time on September 27, 1962; 
that the attorney, Mr. Biddle, had been a member 



of the District Attorney's staff when petitioner 
was originally charged in 1960; that the attorney 
advised him that his case was serious, threatened 
petitioner's life with the gas chamber and pres- 
sured him into pleading guilty; that his attorney 
told him that his escape from the hospital had made 
everyone mad at him and, further, told him: 
'That if petitioner would plead guilty, 
he, Mr. Biddle, could get petitioner life 
imprisonment. Mr. Biddle explained that 
California did not have such sentence as 
life without possibility of parole, that 
petitioner would be eligible for parole 
after seven years. He warned petitioner 
that if he plead guilty that the Presiding 
Justice would state life without possibil- 
ity of parole but only for the benefit of 
public and that petitioner was not to 
become upset when the Judge state (sic) 
life without possibility of parole. But 
if petitioner wished to have him, counselor, 
fight the case petitioner would receive 
the death sentence, because everybody were 
(sic) mad as (sic) petitioner for running 
away from the hospital. ' (Traverse 2d, p. 
13). 
"Petitioner further alleges in substance that 



his counsel pointed out to him that he was a native 
of Georgia and expressed the view that 'if you were 
accused of raping and robbing white women and 
shooting a white man in Georgia - why I doubt 
whether you would have gotten to the jail'; that 
petitioner did not know what else to do but to let 
his counsel enter the pleas of guilty ' to charges 
petitioner did not commit.'" (TR 126-127). 
APPELLANT'S CONTENTIONS 

1. Appellant's allegation that his plea was invol- 
untary required an evidentiary hearing. 

2. Appellant's allegations respecting his relation- 
ship with his court-appointed attorney required an evidentiary 
hearing. 

SUMMARY OF RESPONDENT'S ARGUMENT 

The District Court properly denied appellant's 

petition because his allegations, considered in the light of 

the state records, did not state grounds for relief on 

federal habeas corpus. 

ARGUMENT 

APPELLANT'S PETITION DID NOT STATE GROUNDS 
FOR RELIEF ON HABEAS CORPUS 

The assumption underlying the arguments in appel- 
lant's brief seems to be that the District Court necessarily 
erred when it denied his application without holding an 
evidentiary hearing. This assumption is erroneous, because 
a state prisoner is not entitled to an evidentiary hearing 
unless he comes forward with allegations of fact which would 



tr:.i~:, I- 



warrant the granting of a writ of habeas corpus. See gener- 
ally, Briley v. Wilson , 376 F . 2d 802 (9th Cir. 1967). In the 
present case the court below, after careful consideration of 
petitioner's application and respondent's return to the order 
to show cause, directed respondent to produce all available 
records of the state court proceedings, and, what is signifi- 
cant for present purposes, requested appellant to file a 
supplement to his petition. In this request the court gave 
appellant detailed instructions as to the specific factual 
matters his supplement should contain. See Appendix B. The 
procedure followed by the District Court did not place upon 
appellant "any burden of complying with technicalities; it 
simply demand [ed] of him a measure of frankness in disclosing 
his factual situation." In re Swain , 34 Cal.2d 300, 304 
(1949) . 

Only after examining the documents filed by the 
respective parties did the District Court, having satisfied 
itself that an evidentiary hearing would serve no purpose, 
proceed to deny appellant's petition for the writ. The 
question on appeal is whether that denial is correct. We 
submit that it was. 

On this appeal, petitioner contends that his plea 
was involuntary for several distinct reasons. First, he 
contends that he pleaded guilty under the misapprehension 
that he had been promised a life sentence with the possi- 
bility of parole after seven years . There are two answers 
to this particular contention. First, as this Court has said, 

7. 



"It has been held, and we agree, that mere dis- 
appointment at the severity of the sentence 
received upon a plea of guilty is no ground for 
habeas corpus or other similar relief even where 
defendant's counsel has expressed an opinion 
that leniency will be granted." Gilmore v. 
People of the State of California , 364 F.2d 916, 
919 (9th Cir. 1966) . 

The second answer to petitioner's argument is that 
it appears with unmistakable clarity from the record of the 
entry of plea (Appendix C) that appellant entered the plea of 
guilty to the kidnapping charge with the stipulation that the 
punishment would be life imprisonment without possibility of 
parole and that this fact was clearly explained to him by the 
trial judge. Thus, the District Court could properly con- 
clude that even if an evidentiary hearing were held and peti- 
tioner were permitted personally to testify to his allegation 
that he thought he would receive only a life sentence with 
the possibility of parole, denial of the writ would nonethe- 
less be required in view of the clarity of state court record 
on this issue as well as the existing law that an expectation 
of leniency will not vitiate an otherwise voluntary plea. 
Gilmore v. People of the State of California , supra . 

Petitioner also argues that he was in "an inher- 
ently coercive situation" (AOB 4) , presumably because he was 
facing a capital charge, i.e . , kidnapping with bodily harm. 
However, this Court has made it quite clear that the fact that 

8. 



a defendant is charged with a capital offense does not render 
involuntary his plea of guilty entered in exchange for a 
lesser sentence. Gilmore v. People of the State of California , 
supra , 364 F.2d at 918. 

Finally, appellant urges that a writ of habeas 
corpus should have been granted because the state court did 
not conduct an inquiry into his then present sanity at the 
time his plea was entered. Appellant does not now allege 
that he was insane at that time; however, he argues that 
"under the rule of Pate v. Robinson , 383 U.S. 375 (1966), 
there should have been some kind of hearing on appellant's 
mental state before he was convicted" (AOB 7) . However, as 
pointed out by the District Court in its order, the Superior 
Court had before it a certification by the Superintendent of 
the Patton State Hospital that appellant had been found com- 
petent to stand trial but had left the hospital without per- 
mission. Unlike the situation in Pate v. Robinson , supra , at 
the time of the plea there was no suggestion by either appel- 
lant or his attorney that he was incompetent and therefore 
the trial court could properly proceed on the unchallenged 
assumption that petitioner was competent to stand trial. 

/ 

/ 

/ 

/ 

/ 

/ 

9. 



*■ i'-\n5^:> 



CONCLUSION 

We respectfully submit that the order of the 
District Court denying appellant's petition for a writ of 
habeas corpus should be affirmed. 

Dated: July 10, 1968 

THOMAS C. LYNCH, Attorney General 
of the State of California 

ALBERT W. HARRIS, JR. 

Assistant Attorney General 



ROBERT R. GRANUCCI 

Deputy Attorney General 



RRG : pp 

CR-SF 

66-313 



Attorneys for Respondent-Appellee 



10. 



-i,-. "f^i.:, 






CERTIFICATE OF COUNSEL 

I certify that in connection with the preparation 
of this brief, I have examined Rules 18, 19, and 39 of the 
United States Court of Appeals for the Ninth Circuit and that, 
in my opinion, this brief is in full compliance with these 
rules . 

Dated: July 10, 1968 



ROBERT R. GRANUCCI 
Deputy Attorney General 



11. 



Jl,-^. 



.• -.W 



APPENDICES 



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.//•'' 



1 






OCT 1 1 ,967 
"■^'^'!' «• S. lilZl. COURT 



UNITED STATES DISTRICT COURT 
NORTHERN DISTRICT OF CALIFORNIA 



aiARLES W. DENNIS, 

Pfttltlonar, 

-vs- 

PEOPLE OP TIIE STATE OP 
CALIFORNIA, at «!., 

Raapondent. 



ORDER 



This Is a pecitloo for a vrtt of habeas eorpua 
filed herein under the provlalons of ?G U.S.C. f 2241, by a 
prlaoncr at the California State Prison at San Quentin, now 
in custody of the Warden thereof under the conirnltment of the 
California Superior Court in and for the County of Riverside, 
California, finding him guilty, pursuant to his pleas of 
guilty to charges of assault with a deadly weapon with intent 
to consnit murder (Cal. P. C. Sec. 217), forcible rape (Cal. 
P. C. Sec. 261.(3)), kidnapping for the purpose of robbery 
with the infliction of bodily harm (Cal. P. C. Sec. 209) and 
first degree robbery (Cal. P. C. Sec. 211). 

On September 28, 1962, petitioner was sentenced 
to life imprisonment in the state prison without the possi- 
bility of parole as to the kidnapping offense (for which 
the punishment may be death or life Imprisonment without 
the possibility of parole (Cal. P. C. Sec. 209), and to the 
terms prescribed by lew as to the other offenses, all 
sentences to run concurrently. 

On March 2, 19f6, this Court issued an Order to 

-1- 

APPENDIX A 



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Show C«us«{ on M«reh 25, I9f«, respondent filed It* Ratumt 
and, on Jun« 3, 19C6, petitioner filed a Traversa to the 
Return. 

On December 16, 1966, this Court made Its order 
requiring petitioner to set forth more specific allegations 
and on Febrtsary 3, 1967, petitioner filed a Supplecoental 
Traverse to the Return. 

It sppears from the record that petitioner %»ab 
originally arrested on July 13, 19C0 and indicted for the 
offenses above set forth; that he entered pleas of not guflt] 
and also not guilty by reflson of insanity; that on September 
24, 19tO, he vas eopsnltted to Patton State Hospital by 
the Superior Court upon a finding of doubt as to his then 
present sanity; that petitioner escaped from Patton State 
Hospital; that a court bench varrant, dated Sopterober 12, 
1962, Issued en the basis of an affidavit by the District 
Attorney of Riverside County contalnl.nj a certification by 
the Superintendent of the Patton State Hospital to the 
effect that petitioner had been found competent but had left 
the hospital without porrofssion, and su^^esting petitioner's 
return to the custody of the court. 

Petitioner was eventually apprehended In Florida 
and brought before the court for arraignment on September 24 
1962. The Public Defender, Mr. Biddle, vas appointed to 
represent petitioner and the case vas set for trial or 
further proceedings. 

On September 2d, 19(2, represented by Mr. Biddle, 
Public Defender, petitioner withdrew his former pleas of 
not guilty and not guilty by reason of Insanity and on the 
sane day was sentericed as already above set forth. 

Petitioner contends (1) that he va» inadequately 
represented by counsel, and (2) thnt his picas of guilty to 



.2- 



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th« above charges vera Involuntary » alleging In aubatanca 

and affect that h« \iaB mJ a tre^n tad by offielala after hla 

arreat In July, 1960 and during hla atay at Patton State 

Hoapltal; that after hla return to court from Florida, hla 

court^appolnted counsel vlalted him for the flrat and only 

tine on September 27, 19f>2; that the attorney, Mr. Blddle, 

had been a member of the District Attorney's ataff when 

petitioner waa originally charged In 1960; that the attorney 

advlaed him that his caae was aerlous, threatened petition* 

er'a life with the gaa chamber and pressured him into 

pleading gulltyt that hla attorney told hln that hla escape 

from the hospital had made everyone niad at him and, further, 

told hint 

"That if petitioner would pleod guilty, he, 
Mr. Blddle, could j;at petitioner life iinprlaon- 
ment. Mr. BId<1l« e.-cplalned that CalJfomla did 
not hove auch seutencG as Hfc without possibll* 
Ity of purole, that ppticfoucr would be eligible 
for parole after seven yeura. lie warned 
petitioner that if be plcnd guilty that the 
Prealdfnj Justice would Btate life without 
possibility of parole but only for the benefit 
of public and that pctitlorer was not to becone 
upset when the Ju<JI,7.e atato (sic) life without 
posalbfllty of parole. But If petitioner wished 
to have him, counselor, fl»,ht the case petition- 
er would receive the death scnter.ce, because 
everybody were (sic) mad as (sic) petitioner for 
rurninj away from the hospital." (Traverse 2d, 
p. 13). 

Petitioner further alle^^es In substance tliat he 
asserted his Innocence of the crimes but that his courisel 
pointed out to him that he was a native of Georgia and 
expressed the view that "if you were accused of raping and 
robbing white women and shooting a white tnan in Georgia • 
why 1 doubt whether you would have gotten to the jail"; 
that petitioner did not know what else to do but to let his 
counsel enter the pleas of guilty "to charges petitioner 
did not consnlt". 

Concerning petitioner's allc^^ratlon that his sttomey 
-3- 



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h«d b««n • io«mb«r of th« District Attorney's staff wh«n 
petitioner was originally charged, the Reporter's Transcript 
of September 28, 1962 (pp. 1-2) shows that this elreunatance 
was fully explained In open court and that defendant approved 
of the appointment. 

Petitioner's allegation that his attorney alluded to 
the possibility of the gas chamber and to the circumstances 
of the effect of his escape from Patton, and pressured hl» 
into pleading guilty, does not atoount to a substantial 
allegation of coercion. The gas chancer vas a real posslbll* 
Ity because petitioner was charged with violation of Cal. 
Penal Code f 209 (which provides the penalty of death or life 
InprlsonBient without possibility of parole in cases wtiere the 
person subjected to kidnapping suffers bodily harm). It was 
counsel's duty to frankly advise petitioner of all the 
circumstances. 

Concerning petitioner's contention that his attorney 
was Incort^etent and tliat petitioner was denied adequate 
representation by counsel, petitioner's allegations that his 
counsel visited hln but once does not necessarily amount to 
a charge of inadequacy of representation. 

Ther* is nothing to Indicate that counsel failed to 
properly Investigate and consider possible defenses. Nothing 
Is alleged that would negate the possibility that counsel's 
Information concerning the available evidence Justified the 
advice to plead guilty notwithstanding potl doner's alleged 
assertion of Innocence. Certainly, such advice should not 
be presumed to have been given by the attorney through 
incompetence or malice. 

PetlticHier's allegation that his attoimey told him 
-4- 



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that h« would ba aliglbU for parol* on Ch« kidnapping charge 
In aevan years, tsuat ba conaldored In tha llghc of tha pro- 
ceedlnga at tJjna of plaa. (Reporter'* Tranacrlpt (RT p. 3), 
which proceedings were as follows: 

"MR. BIDDLE: Count two. Your Honor, with 
respect to count two, it Is the defendant 'a 
desire to enter a plea pursuant to Section 1192.3 
of the Penal Code, under which section la !•• 
prlaonment vt thout possibility of parole, 
(etnphasla added). If it 1* agreeable with the 
District Attomey'a Office, tt is the defendant's 
desire to enter a plea to count two." 
California Penal Code f 1192.3 allowa a defendant 
charged with an offense ton>«clfy In his plea of guilty the 
punishment he 1* to receive. If the plea la accepted by the 
prosecuting attorney in open court and is approved by the 
court, the defendant cannot be aeiitenced to * punishment more 
severe than that specified in the plea. 

The Reporter's Transcript further shows ttiat the Court 
then read count two to the petitioner (RT 3), and proceeded 
to explain to petitioner the consequence of hla plea (RT 4-5) 
aa follcvsz 

"THE CCURTj . . . Your cour.sel, the Public 
Defender here, has stated tliat you wish to entet 
a plea of guilty to this count and admit the 
fact that you were orraed with a deadly weapon, 
as provided In Section 1192.3 of the Penal Code 
of this State, that you be lrTi>rl«on©d in the 
State Prison for tha terra no greater than the 
remainder of your natural life, without poaslbll 



ity of pnrole. Is that your under* tandinj of 
this xoatter? (emphasis addod). 
♦5- 



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THE DEFEMOAIlTt Yb«, air. 

THE COURT: !• It your wish to Anter • pl«« 
of guilty to count two as cKarj^ad In th* Indlet* 
tamtt «• I hav« Just read It to you? 

THE DEFE^JDA^^^: y«8. 

THE COURT; No forca or duress has bsen 
•x«rted upon youT 

THE DEFEtrOAHTi Ko, sir, 

THE COURT: And may I aak If thsrs havs b«en 
any proniisea. Has any promlsa bean given you 
with respect to this plea 7 
THE DBTEWOAOT: No, sir. 

THE COURT: Tha plea of guilty to count two 
of tha indictment will be entered vlth a fur the: > 
provision this plea Is made under Section 
1192.3 of the Pei^ul Coda, with the admission th^ 
defendant was armed with a deadly weapon." 
The trial court then proceeded to read each of tha 
other counts of tha Indictment to petitioner and petitioner 
pled guilty to each of the counts already above set forth. 

The Reporter's Transcript further shows that 
petitioner waived time for sentence (RT 11-12) and tlvit the 
court then Imposed sentence on count two: 

THE CC'URT: ... As to count two of tha 
Indictment It will be the Judgment and order ol 
tha Court that Charles Villi am Deimls ba 
Imprisoned in the Stdte Prison for tha remaind4r 
of his natural life, without possibility of 
parole." 
Petitioner's allesatlon concen-.tn; his attorney's 
assurance of parole ell|;ibillty in seven years irust ba con» 
sidered in the context of those procaiidinj^s. 

W« can understjind that, vhcre (as In Gllnore v, 

-6- 



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California . 3C4 F.2d 916, 918-919 (9th Clr. 1966) « patltion 
«r alleges th«t his ottomoy had told h<m that there was a 
"prccilse" by th« Court, "an aj;reer>f>nt'' with the Dlatrlct 
Attorney, and in effect • "del" for a lenient aentence, the 
allegation (allowing for leek of shill In pleading), should 
be regarded aa Inplfedly stating that there vaa such a deal 
in vhlch the court and proeecutlon part'c tpated. Here, 
however, petitioner's allegation concerning vhat his attorney 
told him falls far short of statin's, Implying or sussosttng 
any statenetit bj the sttoxney that such » deal had been made 
with the coijrt and/or the prosecuting attorney. 

Petitioner merely allc.^ea that the attorney explainer 
to hlra (erroneously) that California did not have life 
sentence without possibility of parold and that petitioner 
would be eligible for parole after seven years, coupled 
with the attorney's further statcvnent to th-j effect that the 
Jud^te would, nevertheless, state "life without possibility 
of parole." 

There Is nothing In this alle:jation to support the 
implication that petitioner was being toid of any "deal" 
for life with possibility of parole - only the attorney's 
erroneous explanation that petitioner would get parole In 
seven years no matter what the Jud<5a on the bench mlsht say. 

We cannot, therefore, treat petitioner's allegation 
as intending to state either thnt there was such a deal or 
even that the attorney told him there vas such a deal. 

The petition In the pending case falls within the 
rule, recognized In Gllinore. anpra. that mere dlaappolntrnent 
at the severity of the sentoi-ice received upon a plea of 
guilty i» no ground for habeas corpus "even whara dpCci-idant'n 



C0un98l exorc33Cd an oninjon tl^.-'t Icr.lf ncv vlll be Trnnfrd". 
(emphasis added). See Pinodo v . Uiltred St^Jtes. 347 F.2d 

-7- 



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142 (9th Clr. 1965) i Unf.tpd States v. PorrJno. 2 12 F.2d 
919 (2d Clr. 1954). 

Revercln.) to our pravious refercnc* to alleged 
Incompetercy of counsel, we do not believe that the mere ellc 
gatlon that the attorney erroneously stated the lav regarding 
penalty on conviction of count two alleges Incompetency of 
counsel - especially when read in connection with the 
transcript of proceedings already cited above, indicating 
that counsel did In open court correctly set forth the 
alternative penalty of life without posstbllity of parole 
and that defendant indicated his uiiders tending thereof. 

For the reasons above set forth the Court concludes 
that petitioner's application for tha vrit of habeas corpus 
does not allege facts upon which relief could be granted, 
and it Is therefore ordered as follows: 

(a) That petitioner's application for the writ of 
habeas corpus be denied; (b) tfvat the Order to Show Cause 
heretofore Issued herein be discharged; and (c) that those 
proceedings be dismlsacd. 
Dated: October /CCf- . Vitl . 






-«- 



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•^ 






i/^[i \\'^l^'^XX^^ 



■'i. C!::::u 



uijited states district court 
korthejIh district of CALIFORMA 



CHARLES U. DQJIIIS, 

Petitioner, 
-vg- 

TH2 PSOPLE OF TK2 ST/T2 OF 

CAuroiinLA eud iA\:,\::::cy: k. 

WILSCn, Uufderi, CnliLornia 
Strita Prlflovi nt Sr.n Cusp.t'n, 
Cflllfomla, 

Respondent. 



) 

) 

) ro. A'*833 

) ORDER 

) 

) 

) 



Petitioner, Cherlea V;. Dounls, a prisoner at the 
California State Prisoa at Sna Oucntln, California, has 
petitioned this Court for & Urlt of Habe&a Corpus pursuant 
to the provisions of 24> U.S.C. f 2241 (19(;4) after exhausting 
his state remedies es required by 2li U.S.C. $ 2254 (1964). 

On Kerch 2» 19Ct, this Court Issuod an Order to Show 
Cause; on March 25, 19CC, respm^dcot fUed a Return; and on 
June 3, I9tC<, petitioner filed » Tr-^verae to tlia Return. 

The record heroin clicws thiiit en Septcr.\ber 2ii, 19C2 , 
in the Superior Court of tho Gtete of Cllfomlo In and 
for the Cotjnty of Rlvorafdo, pat'. t-o\^er w.-.a convicted, after 
enter 'ng a plea of i-jullty, of vlolnt'ns C«l. Penal Code 
IS 217 (assault with a derdly vctcpou with Intent to comlt 
nwrder), 261(3) (forcible rrpo), 2 ;9 (k'.(!na:>pln3 vlth bodily 
harm) and 211 (robbery of Lho f'rsc do-rec). Petitioner 
was sentenced to Ufa Imprinoa-^-int '.n the stcte prison 



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and to th« terms prttscrlbad by law at to tha othar offenaaa, 
all aantaneas to run concurrently. 

Patlttonar challenges his convictions upon several 
grounds. Hovever, petitioner's bas!le contentions are that 
h« was coerced Into pleading guilty to the offenses charged 
and that he was not adequately represented by counsel. 

As background information for what actus lly happened, 

petltloaar has supplied the following account: 

"Petitioner was a resident of San Bernardino, 
California from 1959 until about June of 19C0. 
Petitioner cwat the nlle^ed victim ... around the 
middle of tiprcli I960 nt a plnce of entertain- 
ment called 'Siiiall's IM.'^hc Club' in San Bernardino 
Petitioner and the allo;;ed victim developed an 
Intitaate relationship, vhJch later culninated 
into secret rcado?:vous«s. The fllle_^cd vlotiia, 
belnj mijrrfed find w^th fi?oiily, preferred 
discretion end cjterciocd precjutionf.ry nwithods 
to prova-.it discovery of said u^aetin^a. The 
alle3od vie tins rcfuacsd to jjlvo petitioner her 
telephone nuribar, but did Lcko tha telephone 
number of the pccltlcnor vith a procise to call 
patitiOi'.or shortly tLuor the first ruaetiii,^. 
ApproxlLii)tely tvo t.';jci'.:-3 lator tlic. alleged victim 
did call patitionar by phone, raid a date vaa set 
for the next ni2at'»n». Potltionar f.nd the ellesad 
victita went to a dr1ve-in theater, And on that 
date an act of sexu'il 'ntorcourse vr^a consumated, 
follcved by sln^lr.r in r.f.ture therc-'fter. On or 
about June 22i, 19C0, poti tlonar, followlns a 
chain;^€ of rGs!dc::ce from S.'.n Bern/trdino to 
Rlvardd^, Cali foinilc, received another call from 
the alloj;ed vJcthn, rcciujst:!'. ; thr.t the petitioner 
meet her on the next d.'.y, vaich xa^a June 29, 19C0. 
Pot Iff oner r.;>rcod to r.aot her. The plavi was to 
meet In a soclucad Ioc;il!ty, which required that 
both the potitioner r.nd the r.lle;3ed victim drive 
their individual vehicles to the desi-^nated place 
of rendezvous. The allG-^ed victim perked her car 
behind the ctr of the potitionor and thereafter 
Joined the pctitiono.r in his car. Several 
minutes hnd pajaed vhcri a nvan driving a light 
truck appeared en the scere. U,jcn perceiving the 
petitioner, a f;o-ro, f.iid the allo^i'^d vfctim, « 
white wouisn, ser.ceJ ^n the car to.;jethcr, the 
truck driver, without respect for tha privacy of 
othara, rccichod into his glove coRpartinsnt end 
wlthdroxr? wli.it appeared to bo a [jun. Petitioner, 
without knowledjo fs to what !nlo;ht tranapire, 
removed a weapon, v;hich v/.-'S concealed under the 
front se-^t of h's cr.r, i.nd fired at the approach- 
ing Intruder. Petitioner and the alleged vJctlm 
sped away from Che scc.i^ of the alleged criraa 
with the petitioner dr^viiii his cor. uni.-Mflra of 



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"ahot. 

"After tha petlt5.oT\er and the ellesed vletla 
hfld drivan a ahort wpys eway. pecitioncr then 
let the «llcr;cd vlctfsn out of hl» car so she 
could return to her mm vehicle, 

''Upon returning to the scene of the alleged 
crime, the alleged victim, with the Ittcntion 
of protect^nj herself from exposure and 
pernaps destruction to her family life, gfive 
« different version from vhat had transpired 
to the police. 

"Petitioner vrs arrested on or about July 5, 
1960, in the County of Riverside, State of 
California rnd tcken to the County Jail of taid 
county." Petition for Hsbcaa Corpas, pp, 5, 6. 

After his arreat, petitioner alleges. In substance 
•nd effect, that the follcwli^g; events took place: Tliat on 
July 9, 1960, he appeared before a magistrate vho, after 
reeding the complaint, dismissed the case; that the petitioned 
left ttM courtroom, presuoiably free, and was rearrested in 
the corridor and returned to jRil; that on July 13, 1960, 
the Riverside County Grend Jury returned en indlctnsent 
against petitioner charging hlta with the offenses to which 
he eventually pleaded guilty; thst on July 15, 1960, he was 
arraigned on those charges and the public defender was 
appointed to represent hfm; tb^t on September 24, 1960, the 
Court coBKHitted petitioner to the Patton State Hospital for 
a determination as to his sanity; that subsequently he escapejl 
from this hospital and was plcIoDd up in Florida two years 
later and returned to Riverside County on or About September 
22, 1962; that he \fa» arraigned once a^ain on Septetober 24, 
1962, and that on Septei:nber 2b, 19C2, he withdrew his prior 
pleas of not guilty and not guilty by reason of insanity to 
the charges and entered plea^ of guilty thereto. Petitioner 
does not make clear in his potation when he entered his 
original pleas of not guilty and not ^luilty by reason of 
Insanity. 

Petitioner alleges that at this September 28, 1962 



1 court proceeding, Dr. Otto h. G<!rlcktt o£ Patton Stat* 

2 Hospital reported to the Court thet petitioner was sane and 

3 had escaped £roa the hospital. In addition, petitioner 

4 alleges that at this proceeding he waived time for judgment, 

5 vatved reference to the probation offfcer end requested 

6 Imoiedlate sentencitng. 

7 In support of his contentions that his plea of guilty 

8 was coerced and that he was not adequately represented 

9 by counsel, petitioner, alleges the following; That follow- 

10 Ing hie arrest In the corridor of the courthouse on July 9, 

11 1960, Mr. Deal of the Riverside Public Defender's office 

12 cotBe to Bea him and Informed him of the probability of 

13 getting sentenced to the %ea chamber if he did not plead 

14 guilty: that thereafter a doctor visited him and declared 

15 hln sane to stand trial; that following this doctor's 

16 diagnoaia, petitioner w^s subjected to threats and harrass- 

17 ment by the District Attorney, police and the Public Defendejr 

18 which resulted in a complete mental breakdown of petitioner, 

19 wheretipon, two doctors were cent to examine petitioiier end 

20 concluded that petitioner was tnentally unbalanced And that 

21 he should be cooxaltted to Fatten State Hospital; that at the 

22 hospital petitioner was harrassed. Interrogated and Intt- 

23 isated and told by doctors there that he would die in the 

24 gas chasiber If he pcrslsccd in his claim of innocence and 

25 as a result thereof he V7a8 finally driven to escape froia 

26 the hospital; that after he was brought back to Riverside 

27 County on Septeruber 22, 19C2, petitioner was represented by 
2« « Craig Blddle, the Riverside County Public Defender, who 

29 had been In the District Atton^ey's office at the time of 

30 petitioner's arrest In 19C0; *nd thnt Mr. Slddle advised hii|» 

31 that If he fought his esse be would get the gas chamber, bu 



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£or p«roltt In ••varn years. Under petitioner** preeenfc 
■entence he !• never eligible for p«role. 

Petitioner also alleges that his eotinsel» Mr. Blddle, 
did not consult vith him suff Icidntly to adeqxiately represent 
his, to vlt: only one time £rooi the date of his return to 
KlYerslde» California on September 22, 1962 » to the date of 
bis final court appearance on September 26 » 1962. Traverse, 
p. 13. 

Petitioner further alleges In his petition that at 
the time of the offense ha vas an illiterate person without 
formal education and vaa ignorant of the law and its proced* 
ures, and that no one took time to explain things to him. 

Finally, petitioner alleges that at no time during the 
proceedings was he warned or infonoed of his constitutional 
rights to remain silent, to have the assistance of counsel 
at all stages of the proceedings, etc« 

From the foregoing it is the opinion of the Court 
th*t petitioner should su^yply the Court with £ddltlonal facts 
before the Court decides if on evidentiary hearing Is require |, 
Most of petitioner's application is devoted to legal argument 
and to charges of "threats", "coercion" and "horrassment" 
by the authorltlea as well as a rocitation of events prior 
to his arrest. This is not the purpose of habeas corpus. 
Petitioner must give the specific facts of *Vho", "When" 
and '%nMire" In support of his alleged conclusions that he was 
coerced into pleading guilty and was not adequately repre* 
semtsd by counsel. See Schletta v. CaHfomia. 2 84 F.2d 
«27, 834 (9th Clr. 1960). 

In his petition, petitioner does not make clear if 
he made any incriminating statoz&ents to the police, doctors 
or other authorities. All petitioner states is that he 



referrinj to his plea of guilty ps the confession or vhether 
ho iRitde a confession prior to plea. 

Accordingly, tho Court \:IH ^^rcnt potltlonor forty- 
five (45) days from tho dv'Jtc of th^.s I?^terlm Order to file 
a Supplement, In tills Supplcnront, petitioner ohould ^ive 
a day by day account of vhr.c tr/'nspfrcd from SeptcaJier 22, 
19C2 to SoptoDibor 26, 19C2, ^,lvinz cipproxiraota ttraea, persons 
and places ea to all events which support petitioner'* 
contentions that he vas coercod into plcsdln^ guilty and 
that he \fcia not ndcquately represscnted by counsel. In 
addition, petitioner ahould give as bant ho can reinca&or tho 
gist of all ccnversfltlona ha hr.d v'th vfirJoua persona vhlch 
would support thaae content "ons. 

With respect to the period of July 5, 1960, to the 
time of his esci'pe, petitioner shottld Ijkcwijje report the 
aama Ijnforniatlon if It h.sd n boGx-^r.^ ov\ his Geptcir.bcr 2tJ, 
1965, plea of guilty. For eKr.'i;>le, if petitioner during 
th^s tiuie nusde any oral or x-Trittan incx'imlnatinj atateKcnts 
to tho police or others, he ohould give the circumstances 
flurroundln^ the making of such state, cnta (i,c., whet 
caused hlia to rcrtko tho ott!tcn:u:nts) , v;hat the stateaients 
consisted of and other partlculcjs, such gs the approjclraote 
time of the statemant, plscs end x>b>o x.'nc present. If 
petitioner cannot remceibor certain cveato or focts, ha 
should so state. 

Furthermore, In order to aid the Court in decidlnj the 
necessity of an evidentiary hcnr^n^, respondent is requested 
to supply the Court within forty-five (45) days of this 
Intorla Order the follovlr.^ iiifor.v'»tiori: (1) s transcript 
of all Judicial proceedin.rjG coucorain^, petitioner from 
tha data of his arreat on July 5, 19t 0, to his final court 
appearance on Jj 'jptatnber 26 ^ 15£?, .nd (2) all medical reports 



subnvitted to t:h« Rivers ido Superior Court or In the posaess- 
Ion of the prosecuting suchoritlea v^lch vould show the 
loental condition of petitioner from the date of errest on 
July 5, 19C0, until September 28, 1962. 

IT IS TH2 ORDER of this Court that petitioner and 
respondent have forty-five days from the date of this Interim 
Order to provide the ebove requdsted information. 
Dated: Decei-nber /u'Ck- * 1966. 



'mvt^ iiiAV^^' bi;iXKi:T JUociis! 



-7- 



■'t-y -U"*^'- 



IN THE SUPERIOR COURT OF THE STATE OF CALIFORNIA 
IN AND FOR THE COUNTY OF RIVERSIDE 



PEOPLE OF THE STATE OF CALI FORNIA 1 V.*^ ^^^v^' V\, .i. 

Plaintiff, 

-vs- ) NO: CR 1678 

CHARLES WILLIAM DENL'IS, 

Defendant . 



R E P R T bl R ' S H' P A M S C R I P T OF P^^OCEEDINGS 

Before the Honorable Jo'nn G. Gabbert, 
Jud}7;e, of the Superior Court, Department 
TI , on 



SEPTE;^.^.r^;ER 28, 1962 



APPEARANCES: 

FOR THE PEOPLE 



V/ILLIArl 0. ■'•'■ '"^ C K E- V , FIST''' "^ C'l' /,''"^'OTi\'"^Y 
3Y : Roland Wilson > Chief Trial Denuty 
Superior Courthouse, Piver;^ide, California 



FOR THE DEFEHDANa': 

W. CRAIG BIDDLi-:, PUBLIC DEFEK'DER 

Superior Courthouse, Rivr^rside, Cali-!^ornia 



THOMAS J. NOLAN. CSR 
RIVERSIDE, CALIFORNIA 



APPFWDTY n 



SEPTEMBER 28, 1962 - PEOPLE VEPSUS DENNIS 

THE COURT: The matter of People versus 
Charles William Dennis. 

MR. BIDDLE: This matter was regularly 
continued to this time for the settlnc^ of a trial date. I 
wish to advise the Court at the outset, I have advised the 
Defendant, Mr. Dennis, that at the time of the commission of 
the offense, that is when this case arose, when the indictment 
was filed in July of I960, that I did, at that time, serve 
as a Deputy in the District Attorney's Office, but was not 
connected with the case; but I was serving; in the District 
Attorney's Office. 

Mr. Dennis is now aware of that fact and it is my 
understanding, even though this fact has been revealed to him, 
he is willing to allow me to serve as Public Defender. 
Possibly the Court could inquire. 

THE COURT: I will ask you if you have 
been so advised. 

THE DEFENDANT: Yes, sir. 

THE COURT: Do you consent that Mr. 
Biddle, the Public Defender, represent you in this proceedings? 

THE DEPENDANT: Yes, sir. 

THE COURT: It is your understanding 
that Mr. Biddle, at the time this matter v;as brought before 
the Court in July of I960, he was a Deputy in the Office of 



THOMAS J. NOLAN 



the District Attorney? 

THE DKFKN'DANT: Yes. 

THE COUHT: And has since been 
appointed Public Defender and you are ?ir?:reeable he represent 
you? 

THK DEFENDANT: Yes. 

MR. BIDDLE: Your Honor, previously 
a plea of not i^iullty and not guilty by reason of Insanity was 
entered and, at this time, we would ask the Court for 
permission to withdraw the plea for the purpose of entering 
a new and different plea. 

THE COURT: Is that your desire, Mr. 
Dennis? The Indictment here sets forth four different counts. 
At the time of your appearance before Jud/r;e VJalte In i960, you 
entered a plea of not ,f?ullty sncl not f^.uilty by reason of 
Insanity to these four counts. 

THE DEFENDANT: That's rlfrht. 

THE COUT?T: Is It your desire to 
withdraw your plea of not if7;ullty and not guilty by reason of 
insanity to each of these four counts, at this time? 

THE DEFEMDAK'T: Yes, sir. 

THE COURT: V^lth respect to count one, 
have you discussed these with the Defendant? 

MR. 3IDDLE: Yes, I have. 

THE COURT: Do you wish me to take up 
each count? 



THOMAS J. NOLAN 



MP. BIDDLE: Count two. Your Honor, 
with respect to count two, it is the Defendant's desire to 
enter a plea pursuant to Section 1192.3 of the Penal Code, 
under which section is imprisonment without possibility of 
parole. If it is agreeable with the District Attorney's 
Office, it Is the Defendant's desire to enter a plea to count 
two. 

MR. WILSON: With respect to count two, 
there is the allegation of being armed. Is it the Defendant's 
desire to admit that he v;as armed with a deadly weapon? 

MR. BIDDLE: Yes, the Defendant does 
admit he was armed with a deadly v;eapon at the time of the 
commission of the offense. 

MR. V/ILSON: The People will recommend 
that the Court accept the plea to count tvro. 

THE COURT: Mr. Dennis, I'm goin.c; to 
read to you count two which counsel has just mentioned. This 
count reads as follows: 

"For a further and separate cause of action, being 
a different offense of the same class of crimes, and 
offenses, as the charg-e set forth in each of the 
other accounts hereof, the said Charles William Dennis 
Is accused by the Grand Jury of Riverside County and 
State of California, by this indictment, of the crime 
of violation of Section 209 of the Penal Code, 
kidnapping, a felony, committed as follows: The said 

THOMAS J. NOLAN 



Charles V/llliam Dennlrj, on or about Juno 29, I960, 
In the County of Riverside, State of C.?.lirornla, did 
wilfully and unlawfully kidnap ?n6 carry away 
Marp;uerlte P'lul 11 nr?: Anderson for the purpose of 
committing robbery and, while In the commission of 
said offense, did Inflict bodily harm upon the said 
Marf^uerlte MulllniPr Anderson; that at the tlm.e of the 
commission of the offense charr:ed In this count, the 
Defendant was armed with a deadly weapon, to wit: 
a .22 calibre revolver." 

Your co\insel, the Public Defender here, has stated 
that you wish to enter a plea of rullty to this count and 
admit the fact that you were armed v/lth a deadly weapon, as 
provided in Section 1192.3 of the Penal Code of this State, 
that you be imprisoned in the State Prison for the term no 
f^reater than the remainder of your natural life, without 
possibility of parole. Is that your understanding: of this 
matter? 

THE DEPENDANT: Yes, sir. 
THE COURT: Is it your wish to enter a 
plea of guilty to count two as charf^ed in the indictment as I 
have .^ust read it to you? 

THE DEFEMDANT: Yes. 

THE COURT: No force or duress has been 
exerted upon you? 

THE DEFENDANT: No, sir. 



THOMAS J. NOLAN 

CERTIFIED SHORTHAND REPORTBR 
RIVERSIDE. CALIFORNIA 



THE COURT: And may I ask If there 
have been any promises. 

Has any promise been piven you with respect to this 
plea? 

THE DEFENDANT: No, sir. 

THE COUFT: The plea of /rullty to count 
two of the Indictment will be entered with a further provision 
this plea Is made under oectlon 119^.3 of the ^enal Code, with 
the admission the Defendant was armed with a deadly, weapon. 

MR. WILSON: May we have the Defendant 
admit, personally, the possession of a deadly weapon? 

THE COURT: Yes. Mr. Dennis, do you 
admit at the time of the commission of the offense, with 
respect to count two Involvlnf?; Marf^uerlte Mulling: Anderson, 
you were armed with a deadly weapon, a .2? calibre revolver? 

THE DEFENDANT: Yes, sir. 

THE COURT: With respect to the 
remalnln,'; count three of the Indictment snc] count one — 

MR. DIDDLE: To count one. It is the 
Defendant's desire to enter a nlea of r.ullty. 

THE COURT: Count one, Mr. Dennis, reads 
as follows: 

"Charles William Dennis is accused by the Grand 
Jury of Riverside County and State of California, by 
this indictment, of the crime of violation of Section 
217 of the Penal Code (assault with a deadly weapon 

THOMAS J. NOLAN 



with the Intent to commit murder), a felony, 
committed as follows: The said Charles V/llllam 
Dennis, on or about June 29, I960, In the County of 
Riverside, State of California, did wilfully and 
unlawfully assault Leonard Carl Llpskey with a 
deadly weapon, with the Intent to commit murder." 
V/hat is your plea to that count? 

T]m DEFTTNDANT: Cullty. 

TME COURT: Have any promises been made 
to you with respect to your plea v/ith respect to count one? 

THE DKFENDA\'T: Mo, sir. 
TiiE COURT: A olea of guilty will be 
entered as to count one of the indictment. we will take up 
count three. 

THE COURT: Is the Defendant's desire 
also under count three to enter fi p.loa of .(guilty? 

Count three, I v;ill also re?)d to you, Kr. Dennis, 
"For a further and senarate cause of action, bein/r a 
different offense of the same class of crimes and 
offenses as the charp;e sot forth in each of the other 
counts hereof, the said Charles William Dennis is 
accused by the Grand Jury of the Coiinty of Riverside, 
and State of California, by this Indictment, of the 
crime of violation of Section 211 of the ^enal Code 
(robbery), a felony, committed as follov/s: The said 
Charles William Dennis, on or about June 29, I960, in 



THOMAS J. NOLAN 



the Counry of Riverside, State of California, did 
wilfully and unlawfully rob Marr^uerlte Mulllnq; Anderson 
of lawful money of the United States; that at the time 
of the commission of the offense charp;ed in this count, 
the Defendant was armed with a deadly weapon, to wit: 
a .22 calibre revolver." 

Do you understand that count? 

THE DEFENDANT: Yes, sir. 
THE COURT: Have any promises been made 
to you with respect to your plea to count three? 

THE DEFENDANT: No, sir. 
THE COURT: What is your plea to count 
three as I have read it to you? 

THE DEFENDANT: Guilty. 
THE COURT: The plea of n;uilty will be 
entered as to count three. Do you admit, further, that at the 
time of this offense you were armed with a deadly weapon, to 
wit, a .22 calibre revolver? 

THE DEFENDANT: Yes, sir. 
MR. WILSON: At this time, in view of 
his admission of his being armed v;lth a deadly weapon, the 
Court should fix the degree as first degree. 

THE COURT: The Court will fix the 
degree as set forth in count three as admitted by the Defendant 
as robbery in the first degree. As to count four. 

MP. RIDDLE: It is the Defendant's 



THOMAS J. NOLAN 

CERTIFIED SHORTHAND REPORTBH 



desire to enter a plea of r^ullty. 

THE COURT: Count four Is a further and 

separate cause of action, and T will read It to you, Mr. Dennis 
"For a further and oenarate cause of action, being 
a different offense of the same class of crimes and 
offenses as the charsre ^et forth In each of the other 
counts hereof, the said Charles V/llllam Dennis Is 
accused by the Grand Jury of Riverside County and 
State of California, by this indictment, of the crime 
of violation o'" Section 26l, subdivision 3, o^ the 
Penal Code (forcerblc rano), a felony, co-Timltted as 
follov;s: The said Charles '^villian Dennis, on or 
about June 29, 19'''a'), in the County of Riverside, 
State of California, did -Jilfully and unlav/fully 
accomplish an net o^ sexual intercourse with 
Marj-uerite Mullinp: Anderson, a female who was not 
then and there? the wifo o-" the said Charles William 
Dennis, by force and violence ar,ainst the v.-ill and 
v/ithout the consent of said Marr-;uerite Mulling 
Anderson; that at the corrmission of the offence 
charp;ed in this count, the Defendant was armed with 
a deadly weapon, to wit: a .22 calibre revolver." 

You understand the nature of the char,9;e set forth in 

count four? 

THF. DEFENDANT: That's rip;ht. 

THE COUPT: Have any promises been given 



THOMAS J. NOLAN 

CERTIFIED SHORTHAND REPORTER 

RIVERSIDE. CALIFORNIA 



to you with respect to your plea ar? to count four? 

THE DEFENDANT: No, sir. 

THE COURT: Having In mind the count 
V7hlch I have read to you, count four, what is your plea to that 
count? 

THE DEFENDANT: Guilty. 

THE COURT: The plea of guilty will be 
entered as to count four. 

MR. WILSON: An admission of belnp; 
armed? 

THE COURT: Do you also admit at the 
time of the commission of the offense allef^ed In count four 
that you were armed with a deadly weapon > a .22 calibre 
revolver? 

THE DEPENDANT: Yes, sir. 

THE COURT: The Defendant is ready for 



sentence? 



MR. BIDDLE: Yes, Your Honor. 

THE COURT: V/ill you waive time for 



sentence? 



MR. BIDDLE: We v/lll waive time. 

THE COURT: Your counsel has Indicated 
that you will waive time. Because of the circumstances which 
exist, are you wllllnp; to v/alve time for the imposition of 
sentence? The Court otherv/lse would have to continue this 
matter for the purpose of pronouncing; Judgment. Are you wllllnp 

THOMAS J. NOLAN 



10 

to waive such a contlnunnc? ?nfl conr^ont thnt the? Court may 
Impose sentence on the chnrrer, i^ot forth, to v/hl. ch you have 
heretofore entered a ^ler o"^ rullty? 

THE D:^FI^^Tn.'^.^'T: Yer. . 

I^'iR. V,'Tr.r:OM: Do you dor>iro me to arralf^n 
him for Judrrment? 

THE COai^T: Yes, would you please? 
■ MP. WILSOInI: Wr. Charles William Dennis, 
it is my duty to .idvise vou that on July 28, I960, an 
indictment v;as filed in thtt Riverf^ide oupcrior Court, char^^lnp: 
you v/ith a violation of .Socticn 217 in count one and Section 
209 in count tuo, and Section 211 in count three and "ection 
261,3 in count four. In countn tv/o, three and four, there is 
an additional cnar-^e you v/crc arr:;eci ^vith ci deadly v;ea.pon. 

On July 15, 19'''0, you v/ere arrai.Q;ned in the Superior 
Court of the County of Riverside and state<l your true name was 
Charlen V/illiam Dennis. At thrt tin^e, the Superior Court 
appointed the Public Defender to reorescnt you, and the time 
for plea v/as continued to July 26, I96O. 

On July 26, i960, you entered a olea in the Superior 
Court of not r;uilty and not rullty by rrason of Insanity to 
each of the four count^i in tlie Indictment. The trial v;as set 
for October 17, I960, at 10:00 o'clock a. m. in the Superior 
Court, Doctors v/ere appointed to exaraine you and on 
September 21, I960, pursuant to the reports of the doctors, the 
Court committed you to T->attori St'.te Hospital under Section I36B 



THOMAS J. NOLAN 

CERTIFIED SHORTHAND REPORTER 

RIVERSIDE. CALIFORNIA 



of the Penal Code. On September 12, 1962, a Bench Warrant 
was Issued, based on the affidavit of Dr. 0. L. Gerlcke, 
Superintendent of Patton State Hospital, and upon your arrest, 
you were held without ball and on September 24, 19^2, you 
were here In the Superior Court on the Bench V'arrant which 
was Issued on September 12, 19^2, and at that time, the ^ubllc 
Defender v/as reappointed to represent you In the matter and 
It was set for September 28, 1962, at 11:00 a. m.. Department 
II, for further proccedinr^s and, on this date, September 28, 
1962 you entered pleas of pruilty to counts one, two, three and 
four of the Indictment and In counts two and three and four, 
you admitted you were arm..d v;ith a deadly v:eapon. You have 
now waived time for the mutter to be continued for further 
proceedlnp;s and I will asV: you if you have any legal cause to 
shov; why Jud;^ment should not now be nronounced. 

THE DET7ENDAMT: No, sir. 

THE COURT: Is there any legal cause 
to show why Judjriment should not be pronounced at this time? 

MR. BIDDLE: Mo, Your Honor. 

THE COURT: In the matter of Charles 
William Dennis, as to counts one, three and four of the 
indictment, it will be the jud.'7;ment and order of the Court 
that the Defendant, Charles V/llllara Dennis, be sentenced to 
the State Prison for the term prescribed by law. 

As to count two of the indictment, it will be the 
judgment and order of the Court that Charles William Dennis 



THOMAS J. NOLAN 

CKRTiriEO SHORTHAND REPORTER 

RIVeRSIOK. CALIFORNIA 



-^^ 

be Imprisoned in the State Prl'scn for the remainder of his 
natural life, without nor-slMlltv of parole. 

The "herlff of this County is ordered and directed 
to transport the Defendant to the Director of Corrections at 
the California Institute for r-'en at Chlno, California to 
carry out this sentence. 



« * V: A X- 



STATE OF CALIFORNIA ) 

J s s 

COUNTY OF RIVEPSIDE ) 



I, THOMAS J. NOLAN, a certified shorthand reporter, 
do hereby certify: 

That on September 28, 19^2, I took In shorthand a true 
and correct report of the testimony p?;lven and prooeedln<3;s had 
In the above-entitled cause; and that the foree;olng is a true 
and correct transcription of my shorthand notes taken as 
aforesaid, and is the whole thereof. 

Dated: Riverside, California , 19 



Thomas J. Nolan, CSP 



Tunu&Q I Mm Ai 



NO. 22535 & 22535-A 



UNITED STATES COURT OF APPEALS 
FOR THE NINTH CIRCUIT 



ECONO-CAR INTERNATIONAL, INC., 



Appellant, 



vs. 



CARL M. TAUTE, d/b/a ECONO-CAR OF BILLINGS, 



Appellee. 



CARL M. TAUTE, d/b/a ECONO-CAR OF BILLINGS, 



Appellant, 



vs. 



ECONO-CAR INTERNATIONAL, INC., 



Appellee. 



Appeal from the United States District Court 
for the District of Montana, Billings Division 



BRIEF OF APPELLANT ECONO-CAR INTERNATIONAL, INC. 



CROWLEY, KILBOURNE, HAUGHEY, HANSON & GALLAGHER 
500 Electric Building 
P. 0. Box 2529 
Billings, Montana 59101 



FtLEn 



Filed 



, 1968 
, Clerk 



APR ; 2 19b8 
A/ivr R . \u r 



SUBJECT INDEX 

I. SUBJECT INDEX i 

TABLE OF CASES ii 

STATUTES iv 

OTHER AUTHORITIES iv 

II. STATEMENT OF JURISDICTION 1 

III. STATEMENT OF THE CASE 2 

QUESTIONS INVOLVED 16 

IV. SPECIFICATIONS OF ERRORS 17 

V. SUMMARY OF ARGUMENT 21 

ARGUMENT 23 

VI. CONCLUSION 52 



TABLE OF CASES 

Page 
Armington v. Stelle, 27 Mont. 13, 69 

Pac. 115 (1902) 48 

Arnold v. Eraser, 43 Mont. 540, 117 

Pac. 1064 (1911) 48 

Beebe v. James, 91 Mont. 403, 8 P.2ci 

803 (1932) . . • 40 

Biering v. Ringling, 78 Mont. 145, 252 

Pac. 872 (1927) 29 

Brooks V. Brooks Pontiac, Inc., 143 Mont. 

256, 389 P. 2d 185 (1964) 34 

Burnett v. Burnett, 38 Mont. 546, 219 Pac. 

831 (1923) 47 

Como Orchard Land Co. v. Markham, 54 Mont. 

438, 171 Pac. 274, 275 (1918) 40 

Continental Oil Co. v. Bell, 94 Mont. 123, 

21 P. 2d 65 (1933) 27 

Cook V. Northern Pacific Railway Co., 61 

Mont. 573, 203 Pac. 512 (1921) 47 

Cuckovich V. Buckovich, 82 Mont. 1, 264 

Pac. 930 (1928) 33 

Dalacow v. Geery, 132 Mont. 457, 318 P. 2d 

253 (1957) 44 

Flint V. Mincoff, 137 Mont. 549, 353 P. 2d 

340 (1960) 44 

Hammond v. Knievel, 141 Mont. 433, 378 

P. 2d 389 (1963) 49 

Hein v. Fox, 126 Mont. 514, 254 P. 2d 

1076 (1953) 42 

Holland Furnace Company v. Rounds, 139 

Mont. 75, 360 P. 2d 412 (1961) 35 

Hosch V. Howe, 92 Mont. 405, 16 P. 2d 

699 (1932) 48 

Howe V. Messimer. 84 Mont. 304, 275 Pac. 

281, 283 (1929) . 34 

Ikovich V. Silver Bow Motor Car Co., 

117 Mont. 268, 157 P. 2d 785 48 



International Harvester v. Merry, 60 Mont, 

498, 199 Pac. 704, 706 (1921) 34 

Kelly V. Ellis, 39 Mont. 597, 104 Pac. 

873 (1909) 25 

Koch V. Rhodes, 57 Mont. 447, 188 Pac. 

933 (1920) 30,40 

Lasby v. Burgess, 88 Mont. 49, 289 Pac. 

1028 (1930) 40 

Lee V. Stockmen's Nat'l. Bank, 63 Mont. 

262, 207 Pac. 623 (1922) 31 

Leigland v. McGaffick. 338 P. 2d 1037, 

135 Mont. 188 (1959) 48 

Leigland v. Rundle Land & Abstract Co., 

64 Mont. 154, 208 Pac. 1075 (1922) 27 

Linn v. French, 97 Mont. 292, 33 P. 2d 

1002 (1934) 48 

Lommasson v. Hall, 111 Mont. 42, 106 P. 2d 

1089 (1940) 40 

Marlin v. Drury, 124 Mont. 576, 228 P. 2d 

803 (1951) 34 

McConnell v. Blackley, 66 Mont. 510, 214 
^ Pac. 64 (1923) 40 

New Home Sewing Machine Co. v. Songer, 

91 Mont. 127, 7 P. 2d 238 (1932) 49 

Ott V. Pace, 43 Mont. 82, 115 Pac. 37 

(1911) 40,42 

Piatt V. Clark, 141 Mont. 376, 378 P. 2d 

235 (1963) 49 

Reilly v. Maw, 146 Mont. 145, 405 P. 2d 

440 (1965) 33 

Riddell v. Peck- Williamson Heating & 
Vent. Co., 27 Mont. 44, 69 Pac. 241 
(1902) 45 

Rowe V. Emerson- Brant ingham Implement Co., 

61 Mont. 73, 201 Pac. 316 (1921) 46 

Ryan v. Aid, Inc., 146 Mont. 299, 406 P. 2d 373 48 



Swan V. LeClaire, 77 Mont. 422, 251 Pac. 

155 (1926) 48 

Union Electric Co. v. Lovell Livestock 

Co., 101 Mont. 450, 54 P. 2d 112 (1936) 48 

Warner v. Johns, 122 Mont. 233, 201 P. 2d 

986 (1949) 29 

Williams v. Hefner, 89 Mont. 361, 297 

Pac. 492 (1931) 40 



STATUTES 

Revised Codes of Montana 1947, 

Section 13-607 24 

Revised Codes of Montana 1947, 

Section 13-907 . 24 

Revised Codes of Montana 1947, 

Section 93-401-13 24,26 



OTHER AUTHORITIES 

Federal Rules of Civil Procedure, 

Rule 9(b) 34 

28 U.S.C.A,, § 1291 2 

28 U.S.C.A., § 1332 1 



\ 



II. STATEMENT OF JURISDICTION 
Jurisdiction of the district court is based upon 28 
U.S>C.A. § 1332 . The complaint (R. 6)* alleges that defendant 
Econo-Car International, Inc. is a New Jersey corporation and 
demands judgment in the sura of $70,179.86. Defendant's peti- 
tion for removal (R. 2) alleges that plaintiff is a citizen 
and resident of the State of Montana and that defendant Econo- 
Car International, Inc. is a New Jersey corporation with its 
principal headquarters and place of business at Union, New 
Jersey. The matter in controversy exceeds $10,000.00 and is 
between citizens of different states. Jurisdiction has not 
been disputed. 

The district court denied defendant's motion for 
partial summary judgment and ruled on defendant's motion for 
protective orders in its order dated August 7, 1967, (R. 35). 
The case was tried to a jury. Judgment was entered in favor 
of the plaintiff in the sum of $7,052.00 on August 16, 1967, 
(R. 82). An order was entered denying plaintiff's motion for 
new trial and denying defendant's motions for judgment not- 
withstanding the verdict and for a new trial on September 20, 
1967, (R. 87). Defendant filed its notice of appeal on 
October 18, 1967, (R. 88). Plaintiff filed its notice of 
appeal on October 24, 1967, (R. 89). 

Defendant filed designation of parts of record and 



* The original papers volume of the record on appeal will be 

cited as follows: (R. ), The reporter's transcript of 

the trial proceedings will be cited as follows: (Tr.V. , 

p. ). 



statement of issues on October 27, 1967, (R. 90). Plaintiff 
filed designation of record on appeal on November 13, 1967, 
(R. 92). The appeal was docketed on January 18, 1968. Juris- 
diction of this court is invoked under Title 28, U.S.C.A . 
§ 1291 . 

III. STATEMENT OF THE CASE 

In the spring of 1963 plaintiff Carl Taute, while 
employed in a management capacity for a wholesale grocery 
company in Billings, Montana, responded to an advertisement in 
the business opportunity section of the Billings Gazette. As 
a result, contact was established between plaintiff and defen- 
dant Econo-Car International, Inc. franchise salesmen, Mr. 
Burko and Mr. Alvarez. (Tr.V.I, p. 26). 

At their second meeting held on or about June 28, 
1963, plaintiff signed an agreement (Pltf.'s Exh. 6 (a photo- 
copy is Appendix "A" hereto)) to become defendant's local 
franchisee in Billings, Montana, for the operation of an Econo- 
Car rental business. Plaintiff and his wife were allowed to 
testify over defendant's objections that prior to their sign- 
ing the agreement Burko made certain false representations to 
them, which will be set forth in more detail below. Many of 
the questions raised on this appeal revolve around whether 
testimony of these representations was properly admissible. 
At the time of the execution of franchise agreement by Taute 
he paid to Mr. Burko the franchise fee in the sum of $6,000.00 
(Tr.V.I, p. 68). A few days later Taute paid to Burko an addi- 
tional sum of $2,345.00 which included a security deposit on 
10 automobiles of Si. 000-00 and the first month's rental of 10 



vehicles in the sura of $1,345.00 (Tr.V.I, p. 69). 

Plaintiff attended a seminar in Elizabeth, New 
Jersey for new Econo-Car franchisees held on August 16 and 17, 
1963 (Tr.V.II, p. 126). He stated that it was a well organized 
program designed to teach novices how to run a car rental 
operation and that "it took two days and we worked" (Tr.V.I, 
pp. 46-47). On the second day of the seminar, August 17, 1963, 
plaintiff learned that those alleged misrepresentations made 
to him by Mr. Burko on June 28, 1963, which he was allowed to 
testify about at the trial, were all false (Tr.V.II, pp. 127- 
128). Thereafter, on or about October 15, 1963, plaintiff 
terminated his employment at Ryan Grocery Company (Tr.V.II, p. 
130). On October 23, 1963, Taute took delivery of his auto- 
mobiles (Tr.V.II, pp. 129-130) and he had his grand opening of 
Econo-Car of Billings on October 24 or 25, 1963 (Tr.V.II, p. 
129). 

Carl Taute operated an Econo-Car rental business in 
Billings from the time of his grand opening in October 1963 
until February 15, 1965, or for a period of about 16 months 
(Tr.V.II, p. 130). He mailed his notice of termination (Pltf . 's 
Exh. 21) under th^ terms of the contract to Econo-Car Inter- 
national, Inc. on November 14, 1964. (Tr.V.II, p. 130). 

Plaintiff filed this action on March 25, 1965, seek- 
ing damages in the sum of $70,179.86 (R. 6). By the first 
claim of plaintiff's complaint he sought damages for alleged 
breaches of contract and by the second claim he sought damages 
for fraud in the inducement of the contract based upon Burko 's 



1 



and amended answer (R, 16, 30) denied any breach of contract or 
fraud and asserted that plaintiff waived any right that he may 
have had to recover damages for fraud, that he accepted and 
ratified any changes in the contract, and that he was guilty 
of laches and estopped from claiming damages by reason of his 
proceeding with the contract after early learning of the falsity 
of their alleged misrepresentations. 

Defendant filed a motion for summary judgment as to 
plaintiff's claim for damages for fraud and a motion to exclude 
testimony as to any representations made by Burko prior to the 
execution of the contract which would tend to add to, vary, 
contradict or alter the terms of the written contract. (R. 32), 
The court denied the motion for partial summary judgment and 
granted in part and denied in part defendant's motions for 
exclusion of testimony regarding Burko *s alleged misrepresenta- 
tions (R. 35), 

After a trial before the court with a jury, the jury 
brought in a verdict for the plaintiff in the sum of $1,052.00 
on plaintiff's first claim and for the sum of $6,000.00 on 
plaintiff's second claim, and judgment was entered thereon o 
(R. 80-81). Defendant filed a motion for judgment notwith- 
standing the verdict (R. 83) and both parties filed a motion 
for new trial (R. 83, 85), all of which motions were denied 
(R. 87). Both parties filed notices of appeal from the judg- 
ment of the district court (R. 88, 89). 

The first question raised by defendant relating to 
plaintiff's claim for fraud is: Was evidence of statements 
allegedly made by Burko to plaintiff prior to the execution 



of the written agreement inadmissible because such statements 
were oral representations relating directly to the subject 
matter of a contract and tended to alter or add to the stipula- 
tions of written contract? 

The full substance of the testimony concerning Burko's 
statement is as follows: 

(a) That he had had a survey of Billings conducted 
and that as a result Econo-Car International, 
Inc. knew the top three locations in Billings 
for a car rental business (Tr.V.I, pp. 37-39; 
Tr.V.II, pp.229, 230, 233). 

(b) That defendant would send a three man crew to 
Billings who knew the top three locations, who 
would call on logical prospects for car rental 
business, develop substations and generally 
assist overall in the first few weeks of the 
business (Tr.V.I, p. 40; Tr.V.II, p. 230). 

(c) That every cent of the $6,000.00 franchise fee 
would be spent in getting the operation going 
(Tr.V.I, pp. 41, 42; Tr.V.II, p. 243), and that 
there would be three full pages of newspaper 
ads in our local paper in connection with the 
grand opening (Tr.V.I, p. 40; Tr.V.II, p. 234). 

(d) That plaintiff had the option of deciding the 
term of the lease between 12 and 18 months as 
an explanation of paragraph 2 of Schedule B to 
plaintiff's Exhibit No. 6 (Tr.V.I, p. 44; Tr. 
V.II. p. 235). 



Each of these elements of extrinsic negotiation were dealt with 
in the franchise agreement (Pltf.'s Exh, 6 and App. "A" hereto) 
as follows : 

Item ; Selection of premises and guidance in setting up opera- 
tions and sales promotion. 
Provisions in Contract (Paragraph 4.C,) 
"4. ECONO-CAR AGREES: 
* * * 

"C, To furnish guidance to the ECONO- DEALER 
in establishing, operating, and promot- 
ing the business of renting automobiles, 
with respect to: 

a) The selection of premises for the 
establishment of places of business, 

b) The institution and maintenance of 
effective and proven office manage- 
ment systems and business operations 
procedures, 

c) The institution of an effective and 
continued sales promotion campaign, 
making available to the ECONO-DEALER 
sales and promotional aids above and 
beyond the Basic ECONO-DEALER' s kit, 
as and when such aids are developed 
by ECONO-CAR's staff," 

Item ; Field representatives. 

Provision in Contract (Paragraph 1 of Schedule "A") 

"The following items are included in the new 
ECONO-DEALER 's Set- Up Kit: 

"1. The ECONO- CAR OPERATIONS AND PROCEDURES 
MANUAL is the ECONO-DEALER 's best friend. TUT 
facets of the ECONO-DEALER 's operation are dis- 
cussed in depth. All new ECONO- DEALERS are in- 
vited to attend THE ECONO-CAR TRAINING SCHOOL in 
Elizabeth, New Jersey, Here the ECONO-DEALER is 
taught the Auto Rental Business including the 
use of all forms and systems. The Operations 
and Procedures Manual serves as a constant re- 
minder of the things learned at the TRAINING 
SCHOOL , Specially trained field representatives 
provide additional on the spot training and 
help." 



Item ; Local newspaper advertising. 

Provision in Contract (Paragraphs 5 and 6 of Schedule "A") 

"5. ANNOUNCEMENT ADVERTISING : ECONO-CAR 
places and runs at its own expense ads in the 
new ECONO-DEALER's newspaper to prepare the 
area for the new ECONO- DEALER. 

"6. PUBLICITY ; Publicity releases are 
made to the ECONO- DEALER'S newspaper of the 
new ECONO- DEALERSHIP," 

Item ; Term of lease of rental automobiles. 

Provision in Contract (Paragraph 2 of Schedule "B") 

" * * * Each lease shall run for a minimum 
period of twelve (12) months to a maximum 
of eighteen (18) months, * * *" 

Plaintiff's complaints as to the matters referred to in the 
alleged misrepresentations do not include complaints that the 
contract as written was breached, but only that the promises 
made by Burko which expanded upon and added to the written pro- 
visions were breached. 

A second question presented as to the claim for fraud 
is whether plaintiff waived any right that he may have had to 
sue for damages for fraud as a matter of law. 

Plaintiff knew or discovered on August 17, 1963, or 
shortly thereafter, that the statements he asserts were made 
by Burko were false, (Tr,V.II, pp. 127-128, 111-112, 129, 238- 
240; Tr.V,I, pp. 71-76), As set forth above, plaintiff at 
that time had not yet quit his job, taken delivery of any auto- 
mobiles, or commenced operations. He had paid the franchise 
fee, a deposit and the first month's rental on 10 cars. 

On or prior to August 18, 1963, plaintiff signed an 



agreement to lease vehicles (Pltf.'s Exh. 7) which provided in 
paragraph 2 that the term of the lease was 18 months subject 
to defendant's right to terminate the lease at any time follow- 
ing the first 12 months. (Tr.V.I, p. 47). This was contrary to 
what plaintiff said Burko said was meant by the 12 to 18 month 
provision of the contract, 

Carl Taute on September 14, 1963, in a letter to Mr. 
Paul McPeake of Econo-Car International, Inc. (Dfdt. 's Exh. 23) . 
outlined in detail the advantages and disadvantages of three 
prospective locations that Mr, Taute had selected for his 
Econo-Car dealership in Billings, and then stated in the last 
paragraph thereof: 

"Paul, know I'm asking a lot- -but- -would you study 
this and call me with your recommendation. I'm not 
trying to put you on the spot--but I would like to 
draw on your experience- -and- -should mileage rate on 
my Plymouths be lO^i?" 

Carl Taute stated in his termination letter dated 
November 14, 1964, (Pltf.'s Exh. 21) that the "only criticism 
I have to offer is toward myself- -simply bit off more than I 
could chew." 

On December 3, 1964, subsequent to the date that he 
mailed his termination letter to defendant, Carl Taute offered 
by letter (Dfdt.'s Exho 24) to continue in business as the 
Econo-Car dealer in Billings if defendant would provide the 
performance bond necessary for renting space at the municipal 
airport in Billings (Tr.V.II, p,133). 

Carl Taute and Econo-Car exchanged considerable 
correspondence between the execution of the franchise agree- 
ment and up to two months after plaintiff's grand opening 



without any mention being made of Burko's representations or 
complaint that they had not been fulfilled (Dfdt.'s Exhs, 23, 
35, 36, 37 & 46). 

Another issue raised here as to plaintiff's claim for 
fraud is whether plaintiff pled and proved all necessary ele- 
ments of fraud and whether the jury was properly instructed on 
fraud. 

The second claim of the complaint alleges that certain 
representations were made by Burko, that they were false, that 
the defendant knew them to be false, that they were made for 
the purpose of inducing plaintiff to enter into the agreement, 
and that plaintiff entered into the contract '*by and through" 
the representations of Burko, and that plaintiff was damaged. 
Plaintiff's pre-trial memorandum (R. 18) adds no new elements 
except that at one point the representations are referred to 
as being "material". 

The only testimony in the record relating to plain- 
tiff's reliance upon Burko's representations is Carl Taute's 
testimony that he relied upon Burko's statement that he knew 
the three top locations in town (Tr.V.I, p. 33). There is no 
testimony that Carl Taute had a right to rely on the statements 
and no other testimony that he did so rely on any of the repre- 
sentations. Certain of Burko's alleged statements were in the 
nature of promises. There is no testimony that these promises 
were made with the intention that they would not be performed. 

Another question raised relative to the fraud claim 
is whether the jury was properly instructed on the elements of 



proved. 

The court instructed the jury as follows: 

"Now, before Mr, Taute may recover on his second 
cause of action, that is the fraud cause of action, 
he must prove the following: 

1, That Burko made false representations; 

2. That Burko knew those statements to be 
false, and if the statements were promises 
of what defendant would do in the future, 
that they were made without any intention 
of performing them; 

3, That Mr, Taute relied on these statements; 
and, 

4. That he was damaged, 

"Now, in connection with damage, if you find that all 
of the foregoing is true; that is, that defendant 
has proved these items by a preponderance of the 
evidence, then the measure of damages here is 
$6,000,00, Diminished, however, by the amount 
that you find this franchise was worth on August 
17, 1963," (Tr,V,III, pp, 281-282, ) 

Another question raised as to the fraud claim is 
whether it was error for the court to allow plaintiff to testify 
that every cent of the franchise fee would be spent in getting 
the operation going, where this had not been pleaded or mention- 
ed in any pre-trial proceedings; plaintiff testified over 
objection that Burko stated to him that "we spend every cent of 
that $6,000,00 franchise fee in getting the operation going 
, , ." (Tr.V,I, p,42). No mention had been made by plaintiff 
as to what use was to be made of the franchise fee in the com- 
plaint (R, 6) or plaintiff's pre-trial memorandum (R, 18). 

The terms and conditions under which vehicles were 
made available by Econo-Car International, Inc, to Carl Taute 
and modifications therein made during the period of the opera- . 
tions raise two issues in this case, (1) whether any such 
changes constituted breaches of the agreement itself and (2) 



Carl Taute ratified and confirmed the contract and thereby 
waived his rights, if any, to claim damages for the alleged 
fraud in the inducement of the contract. 

The franchise contemplated change in the arrangements 
for the availability of automobiles, by providing in part as 
follows: 

"4. ECONO-CAR AGREES: . . . 

D, To make available to the ECONO-DEALER at 
all times a quantity of automobiles for 
use in the daily rent-a-car business on 
the most favorable terms available. These 
vehicles may be made available to the 
ECONO-DEALER on the basis of sale, lease, 
or whatever other method or methods that 
ECONO-CAR shall negotiate in behalf of 
all of its ECONO- DEALERS . . . . 

"5. THE ECONO-DEALER AGREES: . . . 

C, . , . all vehicles must be acquired by the 
ECONO-DEALER on the basis described in 
Schedule "B", or upon such other basis as 
may be presented by ECONO-CAR for the bene - 
fit of the entire ECONO-CAR RENTAL SYSTEM . 
• • • 

E, To operate the ECONO- DEALER'S business in 
accordance with sound business principles, 
while adhering to the standards set in the 
ECONO-DEALER 's manual, and to any modifica- 
tions or changes which may be promulgated 
from time to time by ECONO-CAR for tne bene - 
fit of the entire ggONO-GAR RENTAL SYSTEM and 
each o f its ECONO- DEALERS." (Emphasis supplied). 

(Pltf.'s gxh. 6 ). 

Schedule "B" to plaintiff's exhibit 6 provides that each lease 
thereunder "shall run for a minimum period of 12 months to a 
maximum of 18 months", but on August 17, 1963, prior to the 
commencement of any operations, Carl Taute signed plaintiff's 
exhibit 7 which provided that for the automobiles thereunder 
the term would be "for a period of 18 months from the date of 
delivery , , , except that lessor (defendant) shall have the 



absolute right, in its sole discretion, to terminate the lease 
at any time following the 12th month" and then goes on to pro- 
vide that in the event of early termination that defendant 
would have to make available replacement vehicles under the 
same terms and conditions (Para. 2, pltf.'s exh. 7). 

In November of 1963 defendant notified plaintiff 
Carl Taute that there would be a rate reduction with respect 
to the 1964 automobiles, that the lease term would be changed 
and that there would be an upgrading of the available auto- 
mobiles (Pltf.'s Exh. 9; Tr.V.I, p. 53, V.II, p. 105). Plain- 
tiff paid $129,00 for his 2 door Valiants for the first month 
as provided in Schedule "B" to the franchise agreement, but the 
rate change reduced this sum to $118.00 for the following 
months. With respect to the lease term the rate revision 
notice stated: 

"All 1964 automobiles will be available on 12-month 
leasing terms (instead of the previous 18). Either 
party may, however, extend the term for up to two 
months. This shorter lease term will mean great 
savings to you in maintenance and service costs 
that usually occur between the 13th and 18th months 
of operation." (Pltf. 's Exh. 9 ). 

In February of 1964, defendant announced a new six- 
month leasing program to enable Econo dealers to increase their 
fleet during the busy months. (Dfdt.'s Exh. 39). Plaintiff 
responded to this proposed program by stating that he was 
delighted (Pltf.'s Exh. 39). 

In August of 1964, in response to an inquiry from 
plaintiff, Mr. Paul McPeake of Econo-Car International, Inc. 
advised Carl Taute that if he wanted an extension on the lease 
to January 2, 1965, he should write in and request it although 



Mr. McPeake didn't "know whether Chrysler will go along". 

On or about October 5, 1964, Econo-Car International, 
Inc. announced the leasing program planned for 1965. (Pltf.'s 
Exh. 10). This leasing program was to be for a 6-raonths lease 
term, with the Econo-Car dealer having the option to extend it 
up to one full year, and Chrysler Leasing Corporation having 
the option to extend it by one month. The Econo-Car circular 
dated December 1, 1964, set forth these amendments in more 
detail (Pltf.'s Exh. 16). Plaintiff took delivery of 7 1965 
cars in the fall of 1964, and then terminated his franchise 
agreement as of February 15, 1965, at which time the cars were 
turned in. 

Another area of controversy is whether there was a 
breach of the franchise agreement with respect to the insurance 
provided, and if so, what damages resulted. The franchise 
agreement (Pltf.'s Exh. 6) provided that defendant was "to 
provide the Econo dealer, at no additional expense, with 
standard type automobile insurance" providing for, among other 
things, collision insurance with no more than $100.00 deduct- 
ible (Para. 4.E. of Pltf.'s Exh. 6). A similar provision 
appears in the lease form dated July 10, 1963, executed by 
Carl Taute at Elizabeth, New Jersey, on or before August 17, 
1963 (Pltf.'s Exh. 7, para. 6). 

Plaintiff made one monthly payment to defendant for 
each car. This payment included an unsegregated lump sum for 
the rental pa3anent as well as the amount attributable to insur- 
ance. As of January 1, 1964, the defendant put into effect a 
premium increase of $5.00 per month per car because of increased 



premium costs to it (Pltf.'s Exh. 13). Thus, on a 2 door 
Valiant plaintiff initially had to pay $129.00 per month which 
sum included insurance coverage. Following the rate reduction 
put into effect on December 1, 1963, this sum dropped to $118.00, 
but went back up to $123.00 as of January 1, 1964, as a result 
of the insurance premium rate increase (Tr.V.I, pp. 63-64; V, 
II, p. 138-139). 

In August and September, 1964, Econo-Car International, 
Inc. notified its dealers, including Carl Taute, that increased 
insurance premiums forced it to make a choice between increasing 
its insurance premiums by $8.00 per car per month or going to 
$250.00 deductible from $100.00 deductible collision insurance 
coverage. The company elected to go to $250.00 deductible 
insurance coverage in line with their competitors in the car 
rental business. (See Pltf.'s Exh. 13 and 14). On September 
1, 1964, Carl Taute wrote to Econo-Car International, Inc. 
asking if he had a choice between paying the additional $8.00 
per month to retain the prior coverage, or whether it was 
mandatory that he go to the $250,00 deductible collision cover- 
age. In a letter dated September 18, 1964, Mr. Paul V, McPeake 
of Econo-Car International, Inc, informed him that he had no 
choice (Pltf,'s Exh. 14). Mr. Taute testified in response to 
the question whether he objected to the company's procedure 
that he asked for an option so that he could take his choice, 
and that he didn't know at the time what he would have wanted 
to do (Tr.V.II, pp.140, 141). 

Carl Taute had testified on his deposition that he 
actually had no actual loss by reason of the insurance coverage 



change, that is, that he had had no collision damage to any 
vehicle during that period exceeding $100. However, at trial, 
he checked his records again and testified that in fact he had 
paid a repair bill for a collision subsequent to the time of 
the deductible coverage change. However, he did not verify 
the exact amount of the bill and could not testify to the amount 
that his bill actually exceeded the $100.00 (Tr.V.II, pp. 153 
through 155). 

Carl Taute testified that he knew that Econo-Car 
International, Inc. was a fast growing company, that it was 
only about two years old, and that he did anticipate that there 
might be changes of a certain type in the operations (Tr.V.II, 
pp. 187-188). 

At the time of the increase in the insurance rate by 
$5.00 on January 1, 1964, Econo-Car instituted a system of 5% 
cash discount if bills were paid by the 5th of the month. This 
system was in effect for three months and then was withdrawn 
to revert to the original agreement (Tr.V.II, pp. 106-107). 
Carl Taute requested and was granted an advance for a number of 
his lease payments. Econo-Car International, Inc. gave him the 
57o discount on payments made with the money loaned to him by 
Econo-Car International, Inc. (See Tr.V.II, p. 199). 



QUESTIONS PRESENTED 

1) Whether Burko's alleged misrepresentations relating to the 
subject of the contract made prior to the execution of the 
contract were admissible. 

2) Whether plaintiff waived any right that he may have had to 
sue for damages for deceit or fraud by his proceeding under 
the contract as written after his discovery of the falsity 
of Burko's alleged misrepresentations at a time when the 
contract was largely executory. 

3) Whether plaintiff pleaded and proved all necessary elements 
of fraud. 

4) Whether the jury was properly instructed on the elements of 
fraud. 

5) Whether it was error for the court to allow plaintiff to 
testify that every cent of the franchise fee would be spent 
in getting the operation going where this had not been 
pleaded nor mentioned in the plaintiff's memorandum. 

6) Whether plaintiff by proceeding under the contract and 
accepting and consenting to a number of changes thereto 
ratified and confirmed the contract as changed and waived 
his right, if any, to damages for any prior breaches thereof. 

7) Whether there was a breach of the contract as to the lease 
term arrangements, and, if there was, whether plaintiff was 
damaged thereby. 

8) Whether there was a breach of contract as to the insurance 
terms, and if there was, whether plaintiff proved that he 
was damaged thereby • 



9) Whether the court invaded the province of the jury in its 
instructions interpreting the lease term and insurance term 
provisions thereof. 

IV. SPECIFICATIONS OF ERROR 

1) It was error to allow plaintiff to testify as to statements 
made by Mr. Burko prior to the execution of the franchise 
agreement. The full substance of this evidence is set forth / 
on page 5 herein. 

The objections urged at trial by defendant to this 
testimony, in addition to the motion for protective order and 
for summary judgment as to plaintiff's second claim (R, 32) 
were as follows : 

(a) That such testimony tended to vary or contra- 
dict or explain the words of the printed con- 
tract, that it was in violation of the parol 
evidence rule and that it was offered to alter 
the stipulations of an express contract, (Tr, 
V.I, p. 31). 

(b) That the questions called for answers to vary 
the terms of a written agreement, that it 
called for answers violating the parol evidence 
rule, and that it was legally inadmissible to 
alter the terms of the contract. That some 

of the representations were beyond the scope 
of the pleadings in the pre-trial order (Tr, 
V.I, p. 42), 

2) It was error to deny defendant's motion for partial summary 



judgment as to plaintiff's second claim and to deny any 
part of defendant's motion for protective orders (R. 32,35). 

3) It was error to deny defendant's motion for directed verdict, 
(termed motion for nonsuit), as to plaintiff's second claim 
after completion of plaintiff's evidence (Tr.V.II, p. 243). 

4) It was error to deny defendant's motion to strike all testi- 
mony relating to conversations between Mr. Burko, Mr. Alvarez, 
plaintiff and Mrs, Taute occurring prior to the signing of 
the franchise agreement (Tr.V.II, pp. 243-246). 

5) It was error to deny defendant's motion for a directed ver- 
dict upon completion of all of the evidence (Tr.V.III, pp. 
262-264). 

6) It was error for the court to give the following portion of 

Court's Instruction No. 1: 

"Now, before Mr. Taute may recover on his 
first -- on his second cause of action, that 
is the fraud cause of action, he must prove 
the following: One, that Burko made false 
representations; two, that Burko knew those 
statements to be false, and if the statements 
were promises of what defendant would do in 
the future, that they were made without any 
intention of performing them; three, that 
Mr. Taute relied on these statements, and, 
four, that he was damaged. Now, in connec- 
tion with damage, if you find that all of 
the foregoing is true; that is, that the 
plaintiff has proved these items by a pre- 
ponderance of the evidence, then the measure 
of damage here is six thousand dollars. 
Diminished, however, by the amount that you 
find that this franchise was worth on August 
17, 1963." (Tr.V.III, pp. 281-282 ). 

The objection urged at trial to this portion included that it 
omitted an important element of the definition of fraud, re- 
quired to be proved, that of the right to rely upon the repre- 



support this instruction and that the record showed as a matter 
of law that the plaintiff was not entitled to recover any dam- 
ages on the grounds of fraud, that the evidence showed as a 
matter of law that the plaintiff confirmed the contract and 
waived his rights to damages for fraud (Tr.V.III, pp. 274- 275), . 

7) It was error for the court to refuse to give defendant's 
offered Ins trust ions numbered 1, 2, 3, 4, 10, 11, 12 and 
13 (R. 40-44, 47-51). 

8) It was error for the court to instruct the jury as follows: 

"With respect to the change in the insurance program 
you are instructed that it was the duty of the defen- 
dant to provide, without charge, collision insurance 
with one hundred dollar deductible. And I am satis- 
fied that you know what a deductible policy is. 
Simply means that in the event of a collision and 
damage the insurance company does not pay the first 
hundred dollars. Now, unless you find that the 
defendant proposed an insurance change to which 
the plaintiff consented, and this could be proved 
by an oral agreement, as well as by letters or 
writings, then you may award the plaintiff the 
damage which he sustained. This damage would be 
measured by the premium charged for the months it 
was charged, plus the difference between the value 
of a collision policy with a one hundred dollar 
deductible clause and a policy with a two hundred 
fifty dollar deductible charge. This again spread 
over the months that the two hundred fifty dollar 
deductible policy was in force prior to the termi- 
nation of the contract which was on February 15, 
1965." (Tr.V.III, pp. 283-284 ). 

The grounds of the objections urged at trial were that the 
written instruments taken together and plaintiff's testi- 
mony indicate that the payment made by the plaintiff for 
the lease of the cars included the amount of the insurance 
and the evidence showed that the total amount paid by 
plaintiff to defendant for the lease of its cars was equal 
to or less than the amounts that he bargained for under the 



original agreement, that this portion of the instruction 
invades the province of the jury and is not a proper measure 
of the damages (Tr.V.III, p. 275). 

9) It was error for the court to give the following instruction: 

"With respect to the claimed breach of the leasing 
agreement, in this connection I instruct you that 
unless the plaintiff proposed a change to which the 
defendant agreed, then it was the duty of the defen- 
dant to provide automobiles to the plaintiff for a 
period of eighteen months after the initial dates 
of delivery. In this connection nine cars were 
delivered on October 23, 1963, and one car on 
November 1, 1963. Now, if you find that by reason 
of the changes in the lease terms, and specifically 
I refer to the length of the term of leasing. or the 
turn- back provisions, and again I instruct you that 
it is necessary that these changes be not consented 
to by the plaintiff, and if you find that he suffered 
damage, then you may award him such damage as you 
may find from the evidence that he did suffer. In 
this connection, however, I should advise you that 
the defendant's obligations under exhibit six and 
seven expired within a few days of April 30, 1965, 
and so any change in leasing arrangements wouldn't 
be -- you couldn't consider any damages based upon 
a projection beyond that time.^' (Tr.V.III, 284 ). 

The grounds of the objections urged at trial to this 

instruction included that the instruction was an improper inter-" 

pretation of the language of the franchise agreement taken 

together with Plaintiff's Exhibit No, 7, that the evidence 

showed that plaintiff voluntarily assented to any change in the 

lease by voluntarily turning in his cars, and that it does not 

set forth a proper measure of damages (Tr.V.III, p. 276), 

Further objection was made that the instruction invades the 

province of the jury and interprets the contract contrary to 

the expressed terms of the contract themselves (Tr.V.III, p. 286). 

10) It was error to sustain plaintiff's objection to defen- 
dant's offered Exhibit No. 49 (Tr.V.III, p. 256). 



V. 

SUMMARY OF ARGUMENT 

There is no competent evidence to sustain the verdict 
of $6,000.00, or any verdict, on plaintiff's claim for damages 
for fraud in the inducement of the contract. The fraud claim 
is based solely on alleged oral misrepresentations made by 
franchise salesman Burko prior to the execution of the contract. 
All such representations were inadmissible because they related 
directly to the subject of the contract and tended to add to, 
vary, alter, and sometimes to contradict the express terms of 
the contract. All such negotiations and statements were super- 
seded by the written agreement. The court erred in allowing 
testimony of any such statements. 

The representations were all promises as to what 
would be done in the future except for one statement of an 
existing fact. The statement as to the existing fact was that 
Econo-Car International, Inc. had conducted a survey of Billings 
and as a result thereof knew of the three best locations for a 
car rental business. Plaintiff admitted that he was not damaged 
by reason of his location, stating that in his opinion he had 
a fine location and that he attributed none of his difficulties 
to his location. 

The mere fact that a promise is not carried out is not 
proof that such promise was made with no intention to perform. 
There is no evidence that Burko did not intend to perform any 
of the promises he is said to have made. Without such evidence 
and regardless of the admissibility of the alleged statements, 
plaintiff cannot establish a case on the fraud claim. 

There was also no evidence that Dlaintiff relied on 



any of the representations except for the representation as to 
the three best locations, and as to that, plaintiff proved no 
damages. Fraud is never presumed and must be pleaded and 
proved. The proof failed here. 

Plaintiff was allowed to testify that Burko had 
promised that the entire franchise fee would be spent on the 
grand opening. This was not pleaded and its admission was 
prejudicial error. 

The court's charge to the jury omitted certain 
necessary elements of fraud. 

Plaintiff waived any right that he may have had to 
sue for fraud by ratifying and affirming the contract, by 
assenting to and requesting changes in the contract, and by his 
election to "give it a go" under the contract after his early 
discovery of the alleged fraud at a time when the contract was 
largely executory. Defendant changed its position by reason of 
plaintiff's affirmance of the contract, and plaintiff cannot now 
recover damage for fraud in the inducement of the contract. 

Plaintiff failed to prove a breach of the leasing 
terms of the contract and in any event failed to prove damages 
resulting from the alleged breach. 

The court invaded the province of the jury by its 
peremptory instruction as to the meaning of the contractual pro- 
visions relating to the lease terms and the insurance coverage 
provisions of the contract. 



ARGUMENT 

A. THERE IS NO COMPETENT EVIDENCE TO SUSTAIN THE VERDICT 
FOR FRAUD (Plaintiff's Second Claim) 

1. All testimony of statements attributed to Burko was 
inadmissible for the purpose of showing fraud in the inducement 
of the contract . 

Franchise salesman Burko was said to have made certain 
false representations at and prior to the time of the execution 
of the franchise agreement. All such parol evidence was in- 
admissible under the rule that oral representations preceding 
the execution of a written contract, even though alleged to be 
fraudulent, are inadmissible to vary the terms of the contract 
where the representations relate directly to the matters dealt 
with in the agreement. 

The oral representations to which plaintiff was 
allowed to testify fall into two categories: first, oral 
promises as to what would be done in the future relating 
directly to the subject matter of the written agreement, and, 
second, a representation as to an act which had been done by 
Econo-Car and as to knowledge which they then possessed. The 
promises were: 

(1) That defendant would send a three man crew to 
Billings to assist plaintiff in selecting a 
location for his car rental business and in 
getting the operation started, 

(2) That there would be three full page ads in the 
local newspaper in connection with plaintiff's 
grand opening, 



(3) That plaintiff would have the option to 
decide the term of the lease between 12 
and 18 months , and 

(4) That every cent of the franchise fee would 
be spent in getting the operation going. 

The representation as to the present fact was that Econo-Car 

had previously conducted a survey of Billings and that it knew 

the three top locations for a car rental business therein. 

a. Statutes - 

R.C.M. 1947, § 93--401~13 ; 

"An agreement reduced to writing deemed 
the wholeT V^hen the terms ot an agreement have 
been reduced to writing by the parties, it is to 
be considered as containing all those terms, and 
therefore there can be between the parties and 
their representives , or successors in interest, 
no evidence of the terms of the agreement other 
than the contents of the writing, except in the 
following cases: 

"1. ^^ere a mistake or imperfection 
of the writing is put in issue by the 
pleadings. 

"2o V/here the validity of the agree- 
ment is the fact in dispute. 

"But this section does not exclude other 
evidence of the circumstances under which the 
agreement was made, or to which it relates, as 
defined in section 93-401-17, or to explain an 
extrinsic ambiguity, or to establish illegality 
or fraud. The term agreement includes deeds and 
wills, as well as contracts between parties." 

RoCoM. 1947, § 13-907 ; 

"Written contracts--how modified . A con- 
tract in writing may be altered by a contract in 
writing, or by an executed oral agreement, and not 
otherwise." 

RoC.M. 1947, § 13-607 ; 

"Effect of written contracts. The execution 



of a contract in writing, whether the law requires 
it to be written or not, supersedes all the oral 
negotiations or stipulations concerning its matter 
which preceded or accompanied the execution of the 
instrument." 

b. Cases on Parol Evidence Rule and Fraudulent Representations - 

The leading Montana case setting forth the rule that 
evidence of oral representations relating directly to the subject 
of a contract, as opposed to evidence relating to an independent 
oral agreement on a collateral matter, is not admissible to 
alter the stipulations of a written contract, even if such 
representations are alleged to have fraudulently induced a 
party to enter into the contract is the frequently cited case 
of Kelly v> Ellis, 39 Mont. 597, 104 Pac. 873 (1909 ) . In Kelly 
V. Ellis plaintiff Kelly brought an action for damages for fraud 
or deceit alleging that he had entered into an oral contract, 
subsequently reduced to writing, with the defendant relating to 
the sale of a sheep ranch. The written agreement provided for 
the sale by Kelly to defendant of land, sheep and personal prop- 
erty in Sweetgrass County in exchange for a certain number of 
shares of capital stock, some cash and a promissory note. 
Plaintiff alleged that the prior oral agreement and specific 
oral agreement entered into at the time of the signing of the 
written agreement provided that he was to be the local manager 
of the sheep ranch. The complaint alleged that the defendant 
did not keep and never intended to keep the oral agreement, and 
that the oral promise was a "most important condition of the 
agreement", and but for the promise he would not have sold the 
property. The Supreme Court affirmed the trial court's action 



the plaintiff was barred from recovery by R.C.M. 1947, § 93 - 

401-13 (then § 7873, Revised Codes). The Court stated in part 

"The gist of the complaint is that they have not 
kept or performed the oral agreement to employ 
plaintiff as local manager, and that they never 
intended to keep that agreement when they made it. 
However, for the violation of that promise the 
statute stands as an insuperable barrier between 
plaintiff and any recovery, unless the promise to 
employ him was a matter collateral to the principal 
agreement. 

"k -k -k 

"There is not any attack made upon the validity of 
the written agreement; and, since it appears from 
the complaint that at the time the plaintiff signed 
the written contract upon April 17th he fully under- 
stood and appreciated that it did not contain any 
provision for his employment as local manager, but 
nevertheless voluntarily signed it, he will not be 
heard to say now that such writing does not contain 
all the terms of the agreement for the sale of his 
real and personal property in Sweet Grass County, 
and he cannot bring himself within either of the 
exceptions noted in the statute above. However, 
the writing of April 17th, only superseded all the 
oral negotiations and stipulations between the 
parties so far as such negotiations and stipulations 
related to the matter of their agreement. The Code 
so provides in unmistakable terms: 'The execution 
of a contract in writing, whether the law requires 
it to be written or note, supersedes all the oral 
negotiations or stipulations concerning its matter 
which preceded or accompanied the execution of the 
instrument. ' Section 5018, Rev. Codes. It did not 
necessarily supersede all their prior or contemporan- 
eous negotiations; and, if the defendants by fraud 
or deceit, with respect to some collateral matter, 
induced the plaintiff to sign the writing, then he 
might be heard to complain. 

"k ic -k 

"Unfortunately for plaintiff, he consented to 
the writing of April 17th, which completely super- 
seded the prior oral negotiations, including the 
promise to employ him, and the statutes of this 
state now forbid him to say that there ever was 
any oral promise for his employment. In frankly 
stating all the facts out of which this controversy 
arose, the plaintiff has successfully pleaded him- 
self out of court. His complaint does not state any 



In Continental Oil Co. v. Bell, 94 Mont. 123, 21 P. 2d 
65 (1933 ) plaintiff and defendants entered into contracts for 
the purchase and sale of gasoline, which provided for the 
"price to be charged for gasoline ... to be four cents per 
gallon less than the seller's quoted tank wagon price . , •" 
21 P. 2d at p. 66 . Defendants testified that at the time the 
contracts were negotiated it was orally agreed that if at any- 
time the contract price was more than the "spot market price", 
the defendants were to receive a refund of the difference 
between the two prices. The court held that such testimony was 
inadmissible, stating in part: 

"The test as to when parol evidence varies, 
adds to, or contradicts a written contract was 
announced by this court in Hosch v. Howe, 92 Mont. 
405, 16 P. (2d) 699, 700, quoting from Professor 
Wigmore as follows: 'The chief and most satis- 
factory index is found in the circumstance whether 
or not the particular element of the alleged ex- 
trinsic negotiation is dealt with at all in the 
writing. If it is mentioned, covered or dealt 
with in the writing, then presumably the writing 
was meant to represent all of the transaction on 
that element. ' 

* * * 

"It is insisted that an oral contract which 
is the inducement of the written contract may be 
received in evidence. We recognize the existence 
of such a rule, but its application turns on the 
question of the admissibility of the evidence to 
establish fraud. The exception does not apply to 
a case in which the oral promise relates directly 
to the subject of the contract, even though the 
claim be that the complaining party signed the 
instrument in reliance on such promise." 21 P. 2d 
at 66-67 . 

In Leigland v. Rundle Land & Abstract Co., 64 Mont . 

154, 208 Pac. 1075 (1922 ) an action was brought to foreclose a 

mechanic's lien when the defendant for whom a building was 



constructed failed to make all payments allegedly due under the 

contract. The contract provided for a specific completion date 

and plaintiff failed to meet that date. Defendant sought to 

offset the rental value of the building for the period from the 

specified completion date to the actual completion date against 

the amounts plaintiff claimed to be due under the contract. 

Plaintiff alleged that prior to the signing of the agreement 

he advised defendant that because of business conditions he 

would not be able to complete the building by the specified 

date and that defendant thereupon agreed to eliminate a $25.00 

per day penalty clause from the agreement and "falsely and 

fraudulently" agreed not to hold plaintiff to the specified 

time limit for completion of the contract. 

The Montana Supreme Court affirmed the trial court's 

finding that there were no misrepresentations or fraud and went 

on to point out that as a matter of law the evidence of the 

alleged oral agreement was inadmissible as attempt to vary the 

terms of the written agreement by parol evidence stating: 

"However, the facts pleaded with reference 
to the oral agreement made prior to or at the time 
of the signing of the contract of March 30th do not 
warrant plaintiffs any relief, for it is an attempt 
to vary the terms of a written agreement by parol 
evidence. 

(Quoting statute.) 

"The terms of the agreement were reduced to 
writing by the parties and under section 10517, 
R.C.M. 1921, the written agreement is to be con- 
sidered as containing all of those terms, and no 
evidence of the terms of the agreement other than 
the contents of the writing can be given except in 
the cases mentioned in subdivisions 1 and 2 of said 
section. This oral agreement is not collateral to, 
but a part of, the original agreement. Kelly v. 
Ellis, 39 Mont, 597, 104 Pac. 873. The plaintiffs 



contract does not contain all the terras of the 
agreement, because they cannot bring themselves 
within either of the exceptions noted in the 
statute. Section 10517, R.C.M. 1921." 208 Pac . 
at p. 1078 . 

See also Biering v. Ringling, 78 Mont. 145, 252 Pac. 872 (1927 ). 
In Warner v. Johns, 122 Mont. 283, 201 P. 2d 986 (1949 ) 
plaintiff wife brought an action against her former husband to 
collect $400,00 which she alleged that the defendant had promised 
to pay her for not asking for suit money, attorneys' fees, costs 
or a division of their property in her divorce action. Among 
the allegations was that had it not been for the deception and 
fraud practiced upon her by the defendant in inducing her to 
sign a property settlement agreement not containing such pro- 
visions, she would have demanded a one-half interest in their 
property, costs and attorneys* fees. The trial court found for 
the plaintiff wife, but the Supreme Court reversed, stating in 
part: 

"Defendant contends that the court erred in admitting 
evidence of the negotiations between the parties 
relative to the payment of $400, it being his conten- 
tion that the written agreement may not be altered by 
oral testimony regarding the prior negotiations. 

* * * 

"Plaintiff contends that the general rule stated 
in (R.C.Mc 1947, § 13-607) has no application to 
separate and distinct oral agreements. But to come 
within that exception, this court in Continental Oil 
Co, V. Bell, supra, said the oral evidence 'must not 
in any way conflict with or contradict what is con- 
tained in the written contract. The written contract 
must remain intact after the reception of the parol 
evidence. ' The effect of the oral evidence here was 
to change or add to the settlement agreement. Instead 
of plaintiff merely receiving the personal property 
which she had theretofore taken from the family home 
as stated in the written agreement she was to receive 
an additional $400, This may not be shown by parol 
evidence." 201 P. 2d at dd, 987-989. 



There can be no question that the oral representations 
complained to be fraudulent were dealt with directly in the 
franchise agreement. Therefore, clearly and unequivocally 
under the above cases, all such parol testimony was inadmiss- 
ible. Plaintiff's second claim, for damages for fraud, therefore 
fails completely because it was based solely upon the alleged 
fraudulent representations. 

Plaintiff is not seeking to rescind the contract, but 
instead has affirmed the contract and is seeking damages for 
the alleged breaches thereof in his first claim and damages for 
fraud in the inducement in his second claim. Thus, we are not 
concerned here with those cases where parol evidence has been 
admitted to show that a contract had never taken effect or that 
what appeared to be a contract was in fact not a contract. 
Neither are we concerned with cases holding that a purchaser 
under an executed or nearly executed contract of sale can main- 
tain an action for fraud against the seller for damages for 
false representations in the inducement of the contract where 
these representations relate to existing facts as to the 
quality of the property. A case of this type is Koch v. 
Rhodes, 57 Mont. 447, 188 Pac. 933 (1920 ), in which the court 
held that false statements as to the amount of hay previously 
produced by land, the number of acres of good bottom land in 
an inaccessible area, and the number of acres in another tract 
of land were admissible in an action for damages for fraud. 
These representations in Koch v. Rhodes, supra , were repre- 
sentations as to present facts going to the quality of the 
nroduct- whereas here we have alleged nromises of future 



performance of conditions directly dealt with in the contract. 

2. Plaintiff failed to plead and prove all necessary 
elements of fraud . 

a. Elements of Fraud - 

The applicable law relating to the elements of fraud 
and the proof thereof is set forth in Lee v. Stockmen's Nation - 
al Bank, 63 Mont. 262, 207 Pac. 623 (1922 ) as follows: 

"As defined in our statute, (R.C.M. 1947, 
§ 13-308), 'Actual fraud, within the meaning of 
this chapter, consists in any of the following 
acts, committed by a party to the contract, or 
with his connivance, with intent to deceive another 
party thereto, or to induce him to enter into the 
contract: (1; The suggestion, as a fact, of that 
which is not true, by one who does not believe it 
to be true; (2) The positive assertion, in a manner 
not warranted by the information of the person making 
it, of that which is not true, though he believes 
it to be true; (3) The suppression of that which 
is true, by one having knowledge or belief of the 
fact; (4) A promise made without any intention of 
performing it; or, (5) Any other act fitted to 
deceive. ' 

"As to whether actual fraud has been practiced 
is a question of fact (sec. 7482, Rev. Codes 1921), 
and the burden of proof is upon the one who alleges 
it. (Lindsay v. Kroeger, 37 Mont. 231, 95 Pac. 839.) 

"In order to go to the jury the plaintiff must 
make out a prima facie case embracing the elements 
of actual fraud, viz.: (1) A representation; (2) 
its falsity; (3) its materiality; (4) the speaker's 
knowledge of its falsity, or ignorance of its truth; 

(5) his intent that it should be acted upon by the 
person and in the manner reasonably contemplated; 

(6) the hearer's ignorance of its falsity; (7) his 
reliance upon its truth; (8) his right to rely there- 
on; (9) and his consequent and proximate injury. 

(26 C.J. 1062.)" 63 Mont, at pp. 283-284 . 

b. Plaintiff Failed to Prove Material Elements of Fraud - 

Assuming arguendo that the oral representations, or 
snme of them- were admissible on the fraud claim, plaintiff has 



nonetheless failed to prove essential elements of fraud. For 
example, there is no testimony to the effect that Burko's 
promises, if made, were made without any intention on his part 
that they be performed. Neither is there any testimony in the 
record to the effect that plaintiff relied upon the representa- 
tions, except plaintiff's testimony that he relied upon the 
statement that Burko knew the three top locations in town (Tr,V. 
I, p. 39). 

All but one of the oral representations are clearly 
promises as to what would be done in the future. The only 
representation as to an existing fact is this same testimony 
as to defendant's knowledge of where the three top locations 
for a car rental business were. It is significant that the 
plaintiff testified that he selected his location, that he had 
no complaints with respect to the location, that he felt it 
was a very fine spot, and that he did not attribute any of his 
later difficulties to the location of his business, (Tr.V.II, 
pp. 133-134). Thus, by plaintiff's own affirmative testimony, 
no damages flowed from the only oral representation which could 
be taken as a representation of an existing fact at the time 
of the execution 6f the contract, and the only representation 
as to which plaintiff testified he relied upon. Even as to 
this representation as to the selection of a location plain- 
tiff's actions showed his complete lack of actual reliance 
thereon when he wrote to Paul McPeake (Dfdt.'s Exh, 23) 
apologetically soliciting advice as to his proposed locations 
stating: 



"Paul, know I'm asking a lot — but — would you study 
this and call me with your recommendation. I'm not 
trying to put you on the spot — but I would like to 
draw on your experience--" 

With but the one exception mentioned above all the 
representations alleged to have been made by Burko were promises 
to perform acts in the future. No proof was offered that at 
the time of making the promises there was no intent of perform- 
ing them. Actual fraud is never presumed on the mere fact that 
a promise is not carried out, is not proof that such promise 
was made with no intention to perform. Montana law could not 
be clearer on this point: 

"It is well settled law that the mere fact that 
a promise is not carried out is not proof that such 
promise was made with no intention to perform." 
Reilly v. Maw, 146 Mont. 145, 405 P. 2d 440, 445 (1965 ), 

"It is manifest there is ample evidence to prove 
each of the foregoing stated matters, except the alle- 
gation, a most essential one, that, when defendant 
made his promise, he had no intention of performing 
it, and, consequently, in analyzing the evidence, we 
now address ourselves particularly to that point, 

* * * 

"In this case, the record fails to disclose a 
particle of evidence to prove or tending to prove 
that, when defendant made his promise, he had no 
intention of performing it. * * * Plaintiff's 
testimony, however, does not shed a particle of 
light upon whether or not defendant, at the time 
he made the promise, intended to perform it. Plain- 
tiff's testimony leaves us totally in the dark upon 
that point, except for the presumption of law that 
when defendant made the promise he intended to per- 
form it. That is the presumption. Good faith is 
presumed; fraud is never presumed. The burden of 
proving it is on the party alleging it." Cuckovich 
V. Buckovich, 82 Mont. 1, 264 Pac. 930, 932 (1928 )' .' 

"If fraud, other than that just considered, 
existed, it was only by reason of the making of a 
promise 'without any intention of performing it' 
. . . ; but here both the pleading and the proof 
fall far short of making a case of fraud, as it is 



that Elston did not intend, at the time the promise 
was made, to perform it; the allegations of the 
complaint and the testimony of the defendant go no 
farther than to charge that the promise was not 
performed. Defendant was not, therefore, entitled 
to go to the jury on this defense of fraud." Howe 
V. Messimer, 84 Mont. 304, 275 Pac. 281, 283 (T^79 ) . 

"The mere making of a promise which the promisor 
fails to keep does not constitute actionable fraud, 
(Citing cases.) 

"There being no allegation in the answer, nor 
proof that Bell did not intend to keep his promise 
to cancel and return the papers to defendants, and 
no offer by defendants to perform their part of the 
settlement agreement by payment of the money, de- 
fense upon that ground is not sustained," Inter - 
na tion al Harvester Co. v. Merry, 60 Mont. 4^8, 199 
■ Pac. 704, 706 (1921 ), 

See also Marlin v. Drury, 124 Mont. 576, 228 P. 2d 803 (1951 ). 

c. Fraud Must be Pleaded and Proved - 

Despite the liberality of pleading under the Federal 

Rules of Civil Procedure it is nevertheless necessary to plead 

fraud with particularity. Rule 9(b ) of the Federal Rules of 

Civil Procedure provides as follows: 

"In all averments of fraud or mistake, the cir- 
cumstances constituting fraud or mistake shall be 
stated with particularity. Malice, intent, knowledge, 
and other condition of mind of a person may be averred 
generally," 

In Brooks v. Brooks Pontiac, Inc., 143 Mont. 256, 389 

P. 2d 185 (1964 ) the court stated with regard to pleading and 

proof of fraud the following: 

"We return now to the allegation of the bare 
conclusion 'constructive fraud' previously alluded 
to. It has always been the rule in Montana that 
fraud is never presumed, and that such a charge 
must be sustained by the allegations and proof of 
the facts constituting the fraud. See Teisinger 
v. Hardy, 86 Mont. 180, 282 P. 1050, and Costello 
v. Shields, 99 Mont. 335, 43 P. 2d 879, The rule is 
set fo-rth in Rule 9 Cb'i . M.R.Civ.P- ! 



'" In all averments of fraud or mis- 
take, the circumstances constituting 
fraud or mistake shall be stated with 
particularity. * * -a-' 

"Not having allegations of fact from which 
the conclusion of 'constructive fraud' might be 
reached, the attempt to state a claim for relief 
as a derivative action, as here, fails." 389 P . 
2d at p. 188 . 

Damage is an essential element of fraud in Montana, 

In Holland Furnace Company v. Rounds, 139 Mont. 75, 360 P. 2d 

412 (1961 ) the court stated: 

"Damage, injury, or prejudice from reliance 
on fraudulent representation is a necessary ele- 
ment of fraud whether fraud is being advanced as 
a ground for recovery or defense." 360 P. 2d at p, 
415o 

Nowhere has plaintiff pleaded the materiality of the 
representations, his ignorance of the falsity of the repre- 
sentations, his reliance and his right to rely upon the truth 
of the representations, and his consequent and proximate injury 
by reason of his reliance, 

B. THE JURY WAS IMPROPERLY INSTRUCTED ON THE ELEMENTS OF 
FRAUD 

The court's instruction to the jury on the elements 

of fraud is set forth in the Statement of the Case, supra, p. 

10, No mention is made in this instruction of the following 

essential elements: 

(1) That plaintiff had a right to rely upon the repre- 
sentations ; 

(2) That the representations were material; 

(3) That Mr. Burko intended that they should be acted 
upon; 



(4) That plaintiff was actually injured by reason of the 
representations. 

VJith respect to the measure of damages, the court 
was quite correct in limiting the damages to the amount paid 
for the franchise in view of plaintiff's early knowledge of 
the falsity of the representations. However, the court was not 
correct in stating that the measure of damage was $6,000.00 
less what the jury found the franchise was worth on August 17, 
1963, the date that the plaintiff discovered the falsity of the 
representations. At most, the damages should have been limited 
to the difference in value of the franchise from what it was as 
opposed to what it would have been had the representations as 
alleged been true as limited by the amount paid for it. 

C. THE COURT ERRED IN ALLOWING PLAINTIFF TO TESTIFY AS TO 
ALLEGED MISREPRESENTATIONS NOT PLEADED 

Also very important is the alleged representation 
concerning which plaintiff was allowed to testify which had not 
been pleaded or mentioned in the pre-trial order that the 
entire franchise fee of $6,000,00 would be used for the initial 
opening. This was particularly prejudicial and must have con- 
tributed to the inflaming of the minds of the jury on the 
fraud question. We submit that such a highly inflammatory 
representation must be pleaded and that it was error for the 
court to allow plaintiff to testify thereto. The defendant 
might well have been able to take some measures for defense 
against such an allegation had it been anticipated and had it 
not come as a surprise. 



D. PLAINTIFF WAIVED ANY RIGHT HE MAY HAVE HAD TO SUE FOR 
DAMAGES FOR FRAUD 

1, Argument on the Facts - 

Plaintiff's theory was that after discovery of the 
falsity of the alleged representations, he affirmed and chose, 
to proceed with the contract but preserved his right to sue 
for damages for fraud in the inducement thereof. We contend 
that under the circumstances here, his continuing with the 
contract was a waiver as a matter of law of his right, if any, 
to recover damages for fraud in the inducement. 

The evidence is uncontradicted that the plaintiff 
discovered the falsity of the alleged representations in 
August of 1963. This was nearly two months prior to the time 
that he quit his job, received delivery of any cars and 
commenced operations. At that time he had not changed his posi- 
tion in any respect except for the payment of the franchise fee 
and the initial car rentals. At that time the contract was 
almost wholly executory. At that time it would have been a 
relatively simple matter to effectuate a rescission, if he were 
entitled to such relief. Instead, Carl Taute knowingly and 
deliberately elected to "give it a go" under franchise agree- 
ment and to try out the business. 

Plaintiff's election to go ahead when he knew of the 
falsity of the alleged representations caused defendant to 
change its position to its detriment. Among other things, 
Econo-Car International, Inc. supplied plaintiff with the 
dealer's kit, advertized for his grand opening, sent a man to 
Billines for two days to assist the plaintiff to cet his 



business operating smoothly and to check operations and 
answered numerous letters and phone calls. In addition, 
plaintiff's election prevented Econo-Car from seeking another 
franchisee who may have been willing to continue to operate the 
business permanently. Thus, defendant has clearly been pre- 
judiced if it now is required, in addition to the above changes 
of position, to return the $6,000.00 paid by Taute for the 
franchise. Is not plaintiff now estopped from claiming damages 
for the alleged fraud and barred by laches from pressing this 
claim? This situation is unquestionably illustrative of why 
the courts will generally hold that a plaintiff electing to 
affirm and ratify an executory contract waives any right to sue 
for damages for fraud in the inducement; whereas, if the con- 
tract is executed or nearly all executed when a party discovers 
fraud, he may be entitled to affirm the contract and sue for 
the fraud. 

During the course of the operations, Carl Taute did 
numerous things which tended to indicate his decision to ride 
with the contract and not seek damages from Econo-Car. For 
instance, he humbly requested assistance of Paul McPeake in 
selecting a location in his letter dated September 14, 1963 
(Dfdt.'s Exh. 23). In his termination letter mailed more than 
a year later, November 14, 1964, (Pltf.'s Exh. 21) in stating 
that the only criticism he had to offer was toward himself, that 
he simply bit off more than he could chew. In his letter of 
December 3, 1964, subsequent to his termination letter, he 
offered to continue the business if the company would put up a 



considerable correspondence between the parties to mention, 
suggest or complaint about Burko's representations in any way. 

Finally, the plaintiff entered into new engagements 
concerning the subject matter of the contract, such as adver- 
tising changes, reductions in rental payments on the auto- 
mobiles, changes in insurance premiums, he borrowed money from 
Econo~Car International, Inc., and of course, he impliedly 
agreed to proceed under the contract knowing that the promises 
as he understood them would not be carried out. These activi- 
ties bring him under the rule that if a party claiming to have 
been defrauded enters after the discovery of the fraud into new 
arrangements or engagements concerning the subject matter of 
the contract to which the fraud applies, he will be deemed to 
have waived any claim for damages on account of fraud. 
2. Law on Waiver of Fraud - 

Plaintiff's complaint appears to be founded upon the 
theory that the defendant was guilty of fraud in the inducement 
of the contract, and therefore, plaintiff was entitled to dam- 
ages in the nature of restitution or rescission. But in the 
same complaint, plaintiff sought damages for breaches in the 
contract. These two theories are, of course, mutually exclus- 
ive and plaintiff was faced with the choice of either affirming 
the contract and attempting to recover some damages for the 
alleged fraud in the inducement and for the breach of contract, 
or of contending that he wanted the contract rescinded and was 
entitled to restoration of everything of value contributed by 
him. Plaintiff prior to trial elected to seek damages by way 
.f Y.r-^.rh of contract and damages for fraud in the inducement 



while at the same time affirming and ratifying the contract. 
There are numerous Montana cases holding that a contract must 
be promptly rescinded upon discovery of fraud, or the plaintiff 
will have been held to have ratified the contract and waive the 
fraud : 

Lommasson v. Hall, 111 Mont. 142, 106 P. 2d 1089 (1940) ; 

Beebe v. James, 91 Mont. 403, 8 P. 2d 803 (1932 ); 

Williams v. Hefner, 89 Mont. 361, 297 Pac. 492 (1931 ); 

Lasby v. Burgess, 88 Mont. 49, 289 Pac. 1028 ; 

McConnell v. Blackley, 66 Mont. 510, 214 Pac. 64 (1923 ); 

Ott v. Pace, 43 Mont. 82, 115 Pac. 37 (1911 ). 

Under certain circumstances it appears that a person 

who has been injured by fraudulent acts of another may affirm 

the transaction and sue for damages. 

"It is elementary that a person injured by the 
fraudulent acts of another may elect to rescind 
or may affirm the transaction and sue for damages," 
Como Orchard Land Co. v. Ma rkha m, 54 Mont. 438 , 
171 Pac. 274, 275 (191^ 7: 

Here, however, we contend that this rule is not applicable and 

that plaintiff actually waived his right, if any, to sue for 

damages for fraud because of his early knowledge thereof and 

his thereafter prpceeding under the contract as if the fraud 

had never occurred. This question is discussed at some length 

in Koch v. Rhodes, 57 Mont. 447, 188 PaCo 933 (1920 ) as follows : 

"Appellants contend that the evidence shows a 
condonation of all fraud and fraudulent representa- 
tions charged and waiver of all possible right of 
action for the same, because of the fact that respon- 
dent, after the commencement of this action, paid an 
installment falling due January 1, 1961. It is to be 
noted in this connection that respondent had been let 
into possession of the premises on July 11, 1915, and 

Via a r\a-\r\ ^r^ ar\T-k<a1 1 fln^s SS SnO* that hp. had elected 



to proceed under the contract rather than to 
rescind it, and sue for damages for the alleged 
fraudulent representations. 

* * * 

"Under our statutes and under the authorities, 
one who has been fraudulently induced to enter into 
a contract has the choice of either rescinding the 
contract (Rev. Codes, § 5063) by restoring or offer- 
ing to restore what he has received under the con- 
tract, and recover what he has parted with, or he 
may affirm the contract, keeping whatever property 
he may have received or advantage gained, or sue 
in an action for deceit for the damages suffered 
by reason of the fraud. X-Jhile the affirmance of 
the contract precludes him thereafter from rescind- 
ing, he may still sue for damages, unless he waives 
that right. Como. Orchard Co. v. Markham, 54 Mont. 
438, 171 Pac. 274. On the other hand: 

'"An executory contract which has 
been procured by fraud is not binding 
upon the party against whom the fraud 
has been perpetrated. He may, after 
discovering the fraud, either perform 
Tt or rescind it; and it, witn know - 
ledge of the jzraud, he elects to per - 
Torm it, this is equivalent to his "mak - 
ing a new contract, and to permit hinT* 
under those circumstances to recover for 
fraud would be to do violence to every 
rule i^ipon which compensatory damages 
are allowed . ' McDonough v. Williams 
77 Ark. 261, 92 S.W. 783, 8 L.R.A. 
(N.S.) 452, 7 Ann.Cas. 276. 

* * * 

"And while by an affirmance of the contract 
one may waive, not only his right to rescind, but 
also his right of action for the deceit, it is only 
when such an intention is clearly manifested that 
such a waiver will be declared. There is a clear 
distinction between the waiver of the right to 
rescind and the waiver of the right of action. 
This is pointed out by Mr. Cooley in his work 
on Torts, par. 257, as follows: 

"*The fraud may also be waived by an 
express affirmance of the contract. 
Where an affirmance is relied upon, it 
should appear that the party having the 
right to complain of the fraud had freely 



some form clearly manifested his intention 
to abide by the contract and waive any 
remedy he might have had for the deception'." 
(188 Pac. at pp. 937-938 ) . (Emphasis ours ) . 

While involving an action for the cancellation of 

contract for the sale of real and personal property and for the 

return of certain money paid under the contract, rather than for 

actual damages for fraud in the inducement, in Ott v. Pace, 43 

Mont. 82, 115 Pac. 37 (1911 ), the court discussed at length 

questions concerning waiver of fraud which are pertinent here. 

The court stated in part: 

"During all this time, plaintiff remained in 
possession of the premises and used them and 
appropriated the 1907 crops to his own use. 
Since fraud in the inducement of a contract does 
not make it void, but only voidable (Turk v. 
Rudraan, 42 Mont. 1, 111 Pac. 739), it was within 
the power of Ott to rescind or to treat the 
first contract as valid (1 Page on Contracts, 
§ 139; 9 Cyc. 432, 436); and his continuing 
in possession of the property and his payment 
of the delinquent installment after discover- 
ing the fraud amounted to an affirmance of the 
first contract and constituted a bar to a res- 
cission (citing cases). In Grymes v. Sanders, 
93 U.S. 55. 23 L.Ed. 798, the rule is stated as 
follows: Where a party desires to rescind 
upon the ground of mistake or fraud, he must, 
upon the discovery of the facts, at once announce 
his purpose and adhere to it. If he be silent , 
and continue to treat the property as his own . 
Tie will be held to have waived the objection, 
and will be conclusively bound by the contract , 
as if the mistake or fraud had not occurred. He 
is not permitted to play tast and loose . Delay 
and vacillation are fatal to the right which had 
theretofore subsisted. ' So, also, the substitu - 
tion of the new contract tor the old one amounted 
to a waiver of the fraud which entered into the 
execution of the old one." (115 Pac. at p. 39 ). 
(Emphasis ours ) . 

In Hein v. Fox, 126 Mont. 514, 254 P. 2d 1076 (1953 ) 

the court held among other things, that there had been a waiver 

of the requirement of approval of a contract by the FHA. The 



J 



court stated in connection therewith: 

"The approval by the agency was a condition 
precedent to the actual carrying out of the contract 
and ceased to be such by reason of the waiver. 

"A waiver may be by mere voluntary expression 
of waiver and nearly always by continuing to render 
performance or by receiving further performance from 
the other party, with knowledge that the condition 
has not been performed. 3 Corbin on Contracts, 
§ 755, p. 918." (254 P. 2d at p. 1079 ). 

If a party claiming to have been defrauded enters 
after the discovery of the fraud into new arrangements or 
engagements concerning the subject matter of the contract to 
which the fraud applies, he will be deemed to have waived any 
claim for damages on account of the fraud. An excellent state- 
ment of this rule is found in the California case of Schied v . 
Bodinson Mfg. Co., Cal.App. 1947. 179 P. 2d 380 , as follows: 

"The authorities are uniform in holding that 
a party to an executory contract, who, with full 
knowledge of the facts constituting the fraud com- 
plained of, subsequently, with intention to do so, 
affirms the contract and recognizes it as valid, 
either by his written agreement or by acts and con- 
duct, and accepts substantial payments, property or 
the performance of work or labor not required by the 
original contract, thereby waives his right to dam- 
ages on account of the fraud. * * * 

"The rule with respect to waiver of fraud is 
stated in Burne v. Lee, supra, as follows: 



- ) .. 



II I 



'Now, it is well settled that when a 
party has been induced by fraud to enter 
into a contract, he may elect either to 
rescind the contract by restoring whatever 
he has received under it, or he may affirm 
the contract, retaining whatever advantage 
he may have acquired, and still have his 
action for damages for deceit practiced 
upon him in making the contract. This rule 
is, however, subject to limitations which 
apply whether the contract, to which the 
charge of fraud is addressed, is an executed 
or executory contract o One of these limita- 



been defrauded enters, after discover y 
of the fraud, into new arrangements or 
engagements concerning the subject-matter 
of the contract to wh'fch the fraud applies , 
he is deemed to have waived any claim for 
damages on account of the fraud . The rule 
is cieariy expressed in Schmidt v. Mesmer, 
116 Cal. 267, 48 P. 54, where it is said: 

'"'If, after his knowledge of 
what he claims to have been the 
fraud, he elects not to rescind, 
but to adopt the contract and sue 
for damages, he must stand toward 
the other party at arm's length; 
he must on his part comply with 
the terms of the contract; he 
must not ask favors of the oTHer 
party, or offer to perform the 
contract on conditions which he 
has no right to exact, and must 
not make any new agreement or 
engagement respecting it; other - 
wise he waives the alleged fraud . * * 
Utaiics addea; . ' 

"The foregoing rule has been consistently follow- 
ed in numerous cases. It is the accepted rule in all 
jurisdictions." 179 P. 2d at p. 385 . 

Other cases involving waivers of provisions in a contract or 

the substitution of an executed oral contract for a provision 

in a contract are Dalacow v. Geery, 132 Mont. 457, 318 P. 2d 253 

(1957 ) and Flint v. Mincoff, 137 Mont. 549, 353 P. 2d 340 (1960 ) . 

E. ALL TESTIMONY OF STATEMENTS ATTRIBUTED TO BURKO PRIOR TO OR 
AT THE TIME OF THE EXECUTION OF THE WRITTEN CONTRACT WAS 
INADMISSIBLE AS VARYING, ADDING TO, CONTRADICTING OR 
ALTERING THE WRITTEN CONTRACT 

We have dealt with the parol evidence rule at some 
length in a preceding section of this brief with the emphasis 
there on its application to alleged fraud in inducement of a 
contract. Here, plaintiff has also contended that the alleged 
oral representations were admissible to explain the circum- 
stances under which the contract was executed and to explain 



ambiguities in the contract itself. There are a great many of 
cases in which evidence of oral negotiations and alleged agree- 
ments made at or prior to the execution of written instrument 
have been excluded by reason of the parol evidence rule. We 
wish to call the court's attention to a few of these cases. 

In Riddell v. Peck-Williamson Heating & Ventilating 
Co., 27 Mont. 44, 69 Pac. 241 (1902 ) plaintiff subcontractor 
entered into a contract with the defendant to supply certain 
labor and materials in connection with the construction of the 
agricultural building at M.S.C. in Bozeman. When the greater 
portion of the materials and labor had been furnished and per- 
formed by plaintiff, plaintiff abandoned the work because 
defendant refused to pay for the labor and material already 
performed and furnished and sued the defendant for the value 
thereof. Plaintiff alleged that at the time that the written 
agreement was executed, an oral agreement was entered into that 
payments should be made, in conformity with a usage and custom, 
as the work was done and the material furnished. The written 
contract, itself, contained no express provision as to when the 
payments should be made, although the court did state that the 
intention of the parties from the agreement as a whole was that 
defendant should not become indebted to the plaintiff until all 
material was furnished and all labor performed. The court held 
that evidence as to the alleged oral agreement should have been 
excluded. The court stated in part: 

". . .It is perfectly clear that the evidence was 
erroneously received. The rule which prohibits the 
reception of evidence of oral promises or agreements 
made prior to or contemporaneously with the execution 
of a written contract Durnortine to embrace all its 



from the express terms, is declared and interpreted 
by the decisions of this court, as well as prescrib- 
ed by statute. (Citing cases). This rule is appli - 
cable to oral negotiations and aglFeements which vary 
"the legal construction and import ot a written con - 
Tract, although they do not contradict its exp ress 
terms .'' (Emphasis ours). 69 Pac. at pp. 242^'^?3 . 

In Rowe v. Emerson- Bran tingham Implement Co., 61 Mont . 

73, 201 Pac. 316 (1921 ) plaintiff brought an action for a breach 

of warranty of a threshing machine, on which a written warranty 

had been given by the defendant. Plaintiff contended that in 

addition to the written warranty, plaintiff's local sales agent 

made certain oral warranties and representations. . The trial 

court excluded all evidence touching upon the prior statements 

and representations of the local agent in making the sale. The 

Supreme Court affirmed, stating in part: 

"If in the warranty that the machinery ordered 
is 'to be well made, of good material, and with 
proper use and management to do as good work as 
any other machine of the same size manufactured 
for a like purpose' was comprehended a warranty 
that the thresher to be furnished would thresh 
and clean alfalfa as well 'as any other machine 
of the same size manufactured for a like purpose, ' 
the written contract was complete and must be taken 
as a full expression of the agreement between the 
parties. This is so because therefrom it will be 
presumed that every material item and term has 
been placed therein. In such case parol evidence can- 
not be admitted to add another term to the agreement, 
although the writing contains nothing on the parti- 
cular one to which the parol evidence is directed. 
The rule forbids addition by parol where the writing 
is silent, as well as to vary where it speaks. 

* * * 

"The contention that, because 'the written con- 
tract is silent as to the special purpose for which 
the machine was bought, ' the parol understanding 
between the local agent and the plaintiffs can be 
read into it, * * * 

"To allow a claim of this sort to be maintained 
where the narties have put their engagements in writ- 



warranties, and to completely ignore the rule that 
parol agreements leading up to the written contract 
are merged in it." 201 Pac. at p. 318 , 

In Cook V. Northern Pacific Railway Co., 61 Mont. 573 , 
203 Pac. 512 (1921 ) plaintiff shippers brought an action against 
defendant railroad for damages to shipments of lambs sent by 
railway from Montana to Chicago. The Supreme Court upheld the 
District Court's order striking all evidence relating to cer- 
tain negotiations between the parties and oral directions given • 
by the plaintiffs as to stops intransit, all as being in viola- 
tion of the parol evidence rule, stating in part: . 

"The negotiations between the parties and the 
directions, given by the shipper preceding the exe- 
cution of the contract and acceptance of it by him, 
are presumed to have been merged in the contract 
itself when it has assumed its final form, and evi- 
dence of terms other than those contained in it 
become wholly incompetent, unless a mistake or im- 
perfection in it has been put in issue by the plead- 
ings, or its validity has become the fact in dispute, 
or it has become necessary to explain an intrinsic 
ambiguity in the contract or to establish illegality 
or fraud." 203 Pac. at 515 . 

In Burnett v. Burnett, 68 Mont. 546, 219 Pac. 831 
(1923 ) the court held that where a note left blank the amount 
of interest to be charged, oral testimony that the parties under- 
stood that the note was to be noninterest bearing was held to 
be inadmissible, the court stating in part: 

"In the absence of fraud or mistake, neither of 
which is alleged in the present case, 'when the 
terms of an agreement have been reduced to writing 
by the parties, it is to be considered as containing 
all those terms, and therefore there can be between 
the parties and their representatives, or successors 
in interest, no evidence of the terms of the agree- 
ment other than the contents of the writing. ' Sec- 
tion 10517, Rev. Codes, 1921. In this case the best 
and only evidence of the contract is the writing 
itself. Id. 10516. 



"The written contract superseded all prior 
negotiations and agreements, and to it alone must 
we look to determine the obligation of the defen- 
dant. (Citing cases). 

"Evidence offered to show the understanding 
of the parties as to the payment of interest at 
the time of the execution of the note was properly- 
excluded." 219 Pac. at p. 832 . 

The circumstances suggesting that it would be proper to allow 

parol evidence to explain or add to the terms of a contract 

would certainly have been greater in the above case, than in 

the instant case. Yet, this case along with a number of others 

cited herein illustrate the vigorousness with which the Montana 

Supreme Court has followed the parol evidence rule. See also 

Leigland v. McGaffick, 338 P. 2d 1037, 135 Mont. 188 (1959 ); 

Arnold v. Fraser, 43 Mont. 540, 117 Pac. 1064 (1911 ) ; Hosch v . 

Howe, 92 Mont. 405, 16 P. 2d 699 (1932 ); Armington v. Stelle , 

27 Mont. 13, 69 Pac. 115 (1902 ); Ryan v. Aid, Inc., 146 Mont . 

299, 406 P. 2d 373 ; Ikovich v. Silver Bow Motor Car Co., 117 

Mont. 268, 157 P. 2d 785 (1945 ); Union Electric Co. v. Lovell 

Livestock Co., 101 Mont. 450, 54 P. 2d 112 (1936); Linn v . 

French, 97 Mont. 292, 33 P. 2d 1002 (1934 ) ; and Swan v. LeClaire , 

77 Mont. 422, 251 Pac. 155 (1926 ). 

There are a number of Montana cases in which the 

Supreme Court has allowed parol evidence under one of the 

exceptions to the parol evidence rule. Cases of this type which 

we have examined are clearly distinguishable from the present 

facts and no attempt will be made to discuss them all here. We 

are listing three examples of types of such cases which we 

believe to be typical: 



Piatt V. Clark, 141 Mont. 376, 378 P. 2d 235 (1963 ) 
(Court admitted parol evidence to show 
that the contract had never taken effect.) 

Hammond v. Knievel, 141 Mont. 433, 378 P. 2d 389 (1963 ) 
(Evidence admitted to show that what appeared 
to be a contract was in fact not a contract.) 

New Home Sewing Machine Co, v. Songer, 91 Mont. 127, 

7 p;2d 238 (1932 ) — 

(Court allowed oral testimony to explain 
the term "finance plan" contained in an 
order for 20 sewing machines where radi- 
cally different versions of what the term 
meant were presented by the parties, and 
where the writing clearly and on its face 
did not contain all of the terms and con- 
ditions of the agreement.) 

The trial court ruled that the word "guidance" as 
used in paragraph 4. C. of the contract and other words of the 
contract were ambiguous and that the oral representations were 
admissible to explain the meaning thereof. We vigorously con- 
tend, however, that the word "guidance" as used and explained 
in the contract (see page 6, supra) is clearly not ambiguous 
and that any outside evidence to explain the meaning of the 
word is in clear violation of the parol evidence rule as inter- 
preted by the Montana State Supreme Court. Instead of explain- 
ing the meaning of "ambiguous" terms or explaining the circum- 
stances surrounding the execution of the contract, the repre- 
sentations here add to, vary, amplify and in some respects 
contradict the language of the contract and are therefore to be 
excluded, 

F, THERE WAS NO BREACH OF CONTRACT AS TO THE LEASE TERM 
ARRANGEMENTS AS A MATTER OF LAW 

As is evident from the statement of facts (p, 2, 

supra) the franchise agreement (Pltf.'s Exh. 6) contemplated 



that there would be periodic changes in the basis for supplying 
rental cars to the local dealers. For example, paragraph 5. 
C. provides that vehicles would be acquired by the Econo dealer 
on the basis described in Schedule "B" to the franchise agree- 
ment, or "upon such other basis as may be presented by Econo- 
Car for the benefit of the entire Econo- Car rental system." 
This is entirely logical in view of the constantly changing 
conditions and terms under which Econo-Car International, Inc. 
would be able to acquire the cars from Chrysler Leasing Corpo- 
ration or from any other firm. They would certainly want to 
remain flexible as to such arrangements. 

The lease term in the original franchise agreement 
was simply from "12 months to a maximum of 18 months", with no 
comment as to who had the option. However, on August 17, 1963, 
the plaintiff signed Exhibit No. 7 providing for an 18 month 
term with Econo-Car International, Inc. having the absolute 
right to terminate the lease at any time following the twelfth 
montho Later on, it was announced that the 1964 automobiles 
would be available on a 12 month leasing term, instead of the 
previous 18, and finally Econo-Car International, Inc. offered 
the 1965 cars on a 6 month leasing term with it having the 
option to extend by one month and with the dealer having the 
option to extend by 6 months. We submit that these changes 
were violative of the terms of and in fact contemplated by the 
basic franchise agreement. In addition plaintiff has completely 
failed to show that he was damaged by any of these changes in 
lease terms, and for that matter, it is implicit in the evi- 
dence and is apparent by the use of common sense that the 



shorter the lease term within limits upon which these cars are 
available, the greater advantage to the local Econo dealer. 

Much controversy occurred during the trial with 
respect to the so-called "turn in" requirements. It is worthy 
of note that Plaintiff's Exhibit 6 does not specify any such 
turn in requirements. Plaintiff complained bitterly at the 
trial that he was billed for over $400.00 worth of turn in 
charges at the time he surrendered his automobiles. Upon cross- 
examination, however, it was brought out that Econo-Car Inter- 
national, Inc, went to bat for the plaintiff with Chrysler 
Leasing Corporation and effectively got the turn in charges 
reduced. The maximum possible damages which he proved in this 
connection, even if it be assumed that the requirements were 
tied in to the basic franchise agreement was by plaintiff's own 
testimony $20.50 for one tire. 

G. THE COURT ERRED IN INVADING THE PROVINCE OF THE JURY IN 
ITS INTERPRETATION OF THE LEASE TERM PROVISIONS AND THE 
INSURANCE TERM PROVISIONS OF THE CONTRACT 

In instructing the jury on the lease term provisions, 
the court peremptorily charged them that unless they found 
there was modifications assented to by the plaintiff, he was 
entitled to any damages for an early termination of the 18 month 
lease term set forth in Plaintiff's Exhibit 7. We feel that 
this was error. 

The court also instructed the jury that the defen- 
dant breached the insurance term provisions and that the plain- 
tiff was entitled to the difference in the insurance premiums 
for $100.00 deductible and $250.00 deductible. We feel that 



this was clearly error, in view of the uncontradicted testimony 
that the monthly rental payments to Econo-Car International, 
Inc. for rental, insurance, etc, were consolidated and that 
at all times during the operations plaintiff was paying an 
amount equal to or less than that required by his original 
franchise agreement for the automobiles. 

The court was, of course, correct in instructing that 
the plaintiff had failed to prove any damages by reason of the 
alterations in the advertising program. In fact, the plaintiff 
had received considerably more than he was entitled to under 
the original franchise agreement, 

CONCLUSION 
It is respectfully submitted that the judgment of 
the lower court should be vacated and judgment entered for the 
defendant. 

Respectfully submitted, 

CROWLEY, KILBOURNE, HAUGHEY, 
HANSON & GALLAGHER 



""^^W^^ectric Building (J 

P. 0. Box 2529 

Billings, Montana 59101 
Attorneys for Defendant and 
Appellant Econo-Car 
International, Inc. 



CERTIFICATE OF MAILING 

I hereby certify that on the 5th day of April, 1968, 

I deposited in the Post Office at Billings, Montana, in an 

envelope securely sealed, with postage thereon prepaid, and 

addressed to: 

John C. Sheehy, Esquire 
Hut ton, Schiltz & Sheehy 
Attorneys at Law 

Electric Building 
Billings, Montana 59101, 

true and correct copies of the foregoing Brief of Appellant 

Econo-Car International, Inc. 



Ohe oiTt^T^trt or neysrorDef^ and 
Appellant Econo-Car International, Inc. 




^— ,-«, r- .,-.;, -;«^/-, r-, IN 7 1 ff.N A T.ONAl.. INC t ^ U * > ^ " «> t- /"V L. i_ » V /"V » T U I Tl I 111 i_ M » J l\ U U .\ M (A 

> AND AGREEMENT 



PARTIES: 

A. ECONO-CAR INTERNATIONAL, INC., a New Jersey Corporation having its principal office and 
place of business at 520 Westfield Avenue, Elizabeth, New Jersey, referred to in this agreement 
as "ECONO-CAR". 

B. ly^^^' ^^y ^<?f^t^ (corporation) 

(NAME) (STATE) 

(partnership) (individual profi'rietorship), having its or his principal office and place of business at 
A// ^ r^^Ae>: i^ Z^:^^-<Ce .^/7U n the city .f ./^^^ /Z^yCf^^ 

^ ^- /. . ( ADDRFSSl ^ 

///V' /^l Urc--?-- /'/'.' and referred to in this agreement as "TiiE ECONO-DEALER". 

(STATE) 

EXCLUSIVE FRANCHISE: 

Upon the acceptance of this agreement and the payment by Applicant of the sum of $ ^'^ : - .^--6 -< < 
in cash or certified check, as a franchise fee, ECONO-CAR does hereby award to the ECONO- 
DEALER the exclusive license for the operation of a daily rent-a-car business to the public under 
the trade names "ECONO-CAR" and "ECONO-CAR RENTAL SYSTEM" for: 



'^^^ycO ^^>-//y/^:v^ ^/yy.^^i^. 









TERM: 

This agreement shall continue for a term of fifteen (15) years unless terminated sooner for any reason 
provided in paragraph "12", and may be renewed for successive fifteen (15) year periods or the option 
of the ECONO-DEALER at no additional cost, provided that the ECONO-DEALER has complied with 
the obligations set forth in this agreement. 

ECONO-CAR AGREES: 

A. To permit the ECONO-DEALER, throughout the term of this agreement, to use its trademarks, 
trade names, logotypes and service marks in accordance with company policy and specifically, 
to display the names ECONO-CAR and ECONO-CAR RENTAL SYSTEM prominently in all local 
advertising and at the ECONO-DEALER's premises. 

B. To ship the ECONO-DEALER immediately upon the acceptance of this agreement, the Basic 
ECONO-DEALER's Kit described in the schedule "A" annexed to this agreement and made a 
part hereof. 

C. To furnish guidance to the ECONO-DEALER in establishing, operating, end promoting the busi- 
ness of renting automobiles, with respect to: 

a) The selection of premises for the establishment of places of business. 

b) The institution and maintenance of effective and proven office management systems and busi- 
ness operations procedures. 

c) The institution of an effective and continued sales promotion campaign, making >.:vailcoie to 
the ECONO-DEALER sales and promotional aids above end beyond the Basic ECONO- 
DEALER's Kit, as and when such aids are developed by ECONO-CAR's staff. 




D. To make available to the ECONO-DEALER at oil times a quantity of automobiles for use in the 
daily rent-a-car business on the most favorable terms available. These vehicles may be made 
available to the ECONO-DEALER on the basis of sale, lease, or whatever other method or meth- 
ods that ECONO-CAR shall negotiate in behalf of all of its ECONO-DEALERS. 

ECONO-CAR will, in every case, deliver to the ECONO-DEALER as many cars as the ECONO- 
DEALER may request, subject to the ECONO-DEALER's financial status and ability to meet 
existing business obligations. 

E. To provide the ECONO-DEALER, at no additional expense, with standard-type automobile insur- 
ance providing the following coverage: Automobile public liability and property damage insurance 
with limits of not less than $250,000. for any one person for bodily injury or death and $500,000. 
for any one accident for bodily injury or death; $25,000. insurance for property damage; collision 
insurance with no more than $100 deductible, and automobile and physical damage insurance which 
shall include fire, theft and combined additional coverages, including vandalism and malicious 
mischief, with a $50. per loss deductible. Coverage shall extend to the ECONO-DEALER, his 
agents and employees and those who rent from the ECONO-DEALER in the course of his opera- 
tion of a bona fide rent-a-car service. 

F. To pay to every ECONO-DEALER in good standing a cooperative advertising allowance of up to 
$7.50 per month per car operated by the ECONO-DEALER during the proceeding month, upon re- 
ceipt of proof of local advertising by the ECONO-DEALER in the minimum amount of $15.00 per 
month per car; classified directory advertising shall not be eligible for this allowance. 

THE ECONO-DEALER AGREES: 

A. To devote sufficient time and best efforts to the development and growth of the auto rental busi- 
ness as a member of the ECONO-CAR RENTAL SYSTEM. 

B. To advertise and promote the ECONO-DEALER's association with the ECONO-CAR RENTAL 
SYSTEM through the use of the trade names and styles designated by ECONO-CAR. The ECONO- 
DEALER may not use the name ECONO-CAR, in whole or in part, within the ECONO-DEALER's 
corporate or official business name, but shall, nevertheless, prominently display or use in pre- 
dominant size the names ECONO-CAR and ECONO-CAR RENTAL SYSTEM in all advertising, 
signs, displays, literature, letterheads, etc. 

C. The ECONO-DEALER agrees to add to his fleet of operating vehicles (excluding replacement 

vehicles) a minimum of / outos during each quarter of the first two years of this 

agreement and a minimum of y outos each year thereafter for three (3) sucessive 

years. No additions will be required thereafter, but the ECONO-DEALER shall at all times main- 
tain on active fleet of at least the same size as exists at the end of the fifth year; all vehicles 
must be acquired by the ECONO-DEALER on the basis described in schedule "B", or upon 
such other basis as may be presented by ECONO-CAR for the benefit of the entire ECONO-CAR 
RENTAL SYSTEM. 

D. To maintain the ECONO-DEALER's place or places of business and the ECONO-DEALER's 
vehicles in a clean and presentable condition, and all vehicles shall be physically maintained in 
top operable condition. 

E. To operate the ECONO-DEALER's business in accordance with sound business principles, while 
adhering to the standards set in the ECONO-DEALER's Manual, and to any modifications or 
changes which may be promulgated from time to time by ECONO-CAR for the benefit of the entire 
ECONO-CAR RENTAL SYSTEM and each of its ECONO-DEALERS. 

F. To charge to the public for the rental of motor vehicles, a sum no greater than the rate fixed, from 
time to time, by ECONO-CAR. 

G. To moke available to ECONO-CAR or to its duly authorized representatives, for purposes of 
inspection only, the ECONO-DEALER's books and records; such inspections shall take place 
only during ordinary business hours. 



H. To proceed immediately to obtain a listing and a display advertisement in all classified telephone 
directories servicing the territory covered by this agreement. 

I. To pay any and all federal, state, city or local taxes, fines or assessments that concern the opera- 
tion of the ECONO-DEALER's business, his stock of vehicles or his assets. 

NATIONAL PROMOTIONS: 

ECONO-CAR may, from time to time, engage in national contests and promotions for the benefit of 
the entire ECONO-CAR RENTAL SYSTEM. In the course thereof, ECONO-CAR may be required to 
issue "due bills" which shall be redeemable by contest winners and other recipients, at any author- 
ized ECONO-DEALER's place of business, to be applied as a credit against car rental. The ECONO- 
DEALER shall accept all such "due bills" as may be tendered, to be applied at their full face value 
against actual rental invoices. The ECONO-DEALER may then use such "due bills" so collected 
as cash at 50% of face value, to be applied against the ECONO-DEALER's monthly obligations to 
ECONO-CAR. In no event shall the ECONO-DEALER be obligated to sustain a net cost of more than 
$300. per year in the redemption of such "due bills", and accordingly, when and if this limit is ex- 
ceeded, the remainder, if any, shall be redeemed by ECONO-CAR at full face value. 

AGENCY: 

The ECONO-DEALER is an independent contractor, and is in no sense a legal agent or officer of 
ECONO-CAR, and has no authority to bind ECONO-CAR in any manner whatsoever. 

INDEMNITY: 

The ECONO-DEALER shall indemnify ECONO-CAR and hold it harmless from any claims, demands, 
liabilities, actions, suits or proceedings asserted by third parties, and arising out of the ECONO- 
DEALER's business. 

LOCAL CODES AND ORDINANCES: 

The ECONO-DEALER shall be solely responsible for compliance with all local laws, orders, codes 
or ordinances applicable to the ECONO-DEALER's business. 

ASSIGNMENT: 

This agreement may not be assigned by the ECONO-DEALER without the prior consent, in writing, of 
ECONO-CAR, which consent shall not be unreasonably withheld. Consent is hereby given to the 
ECONO-DEALER, if an individual or partnership, to assign this agreement to a corporation in which 
the ECONO-DEALER holds at least fifty-one percent (51%) of the capital stock. 

EXCLUSIVITY OF BUSINESS: 

Neither the ECONO-DEALER nor the ECONO-DEALER's principals shall, directly or indirectly, dur- 
ing the term of this agreement or for a period of two years after the termination of the agreement, and 
within a radius of 50 miles of the territory herein granted, engage in any activity in competition with 
the business of ECONO-CAR, whether individually, or through a partnership or corporation. 

WAIVER: 

Failure by ECONO-CAR to enforce any of the provisions of this agreement shall not constitute o 
waiver of ECONO-CAR's rights or of the ECONO-DEALER's default, if any. 

TERMINATION: 

The ECONO-DEALER may terminate this agreement at any time by giving ECONO-CAR ninety (90) 
days notice in writing; such termination shall not relieve the ECONO-DEALER from any obligation 
that shall have matured hereunder or under any collateral written agreement of the parties. ECONO- 
CAR may terminate this agreement only upon the occurrence of any of the following conditions: 



A. If the ECONO-DEALER shall fail to meet any obligation provided for in this agreement, where 
such failure shall continue for ten (10) days or more following the mailing to the ECONO-DEALER 
of written notification of default. 

B. Where the ECONO-DEALER discontinues the active conduct of his business. 

C. Upon the transfer or assignment of any part of the ECONO-DEALER's business or assets, which 
results in the passage of control of the business, unless consented to in writing by ECONO-CAR. 

D. Upon the insolvency or bankruptcy of the ECONO-DEALER, voluntary or involuntary, the making 
of on assignment for benefit of creditors, appointment of a receiver or trustee of any part of the 
assets of the ECONO-DEALER's business, the service of a warrant of attachment upon any of 
the assets of the business or upon service of an execution. 

E. If the ECONO-DEALER shall breach any collateral written agreement between the parties. 

Upon termination of this agreement, the ECONO-DEALER shall return to ECONO-CAR, or effectively 
destroy, all literature, signs, advertising material, promotional matter, manuals and other materials 
identifying the former ECONO-DEALER with ECONO-CAR and shall immediately cease to refer to or 
identify himself or itself with ECONO-CAR or with any other trade name or symbol employed by 
ECONO-CAR. The ECONO-DEALER shall arrange for the cancellation of all telephone listings ob- 
tained in the ECONO-CAR name and shall release to ECONO-CAR or its designee all telephone 
numbers included in such listings. The ECONO-DEALER shall thereafter take no action detrimental 
to ECONO-CAR or the ECONO-CAR RENTAL SYSTEM. 



MODIFICATION: 

This agreement constitutes the entire agreement of the parties and may not be modified, except in 
writing, executed by an authorized officer of ECONO-CAR. 



APPROVAL: 

This agreement shall become effective upon its acceptance in Elizabeth, New Jersey by an authorized 
officer of ECONO-CAR. Approval shall be evidenced only by the execution of this agreement by such 
authorized officer and by the mailing to the ECONO-DEALER of an executed copy. This agreement 
shall be construed and enforced in accordance with the laws of the State of New Jersey, and nothing 
herein contained shall be construed as doing business in any other state. If any provision of this 
agreement in any way contravenes the lows of any state or jurisdiction, such provision shall be deemed 
not to be a part of this agreement in that jurisdiction, and the parties agree to remain bound by all 
remaining provisions. This agreement terminates and supercedes any prior agreement of the parties. 



-V yi 



/^./^ ^Z/^ 



ECONO-DEALER-APPLICANT 



:epted: 
dno-car~}nternational, inc. 



,/. 



SCHEDULE "A" 

OF 

THE ECONO-CAR RENTAL SYSTEM 

ECONO-DEALERSHIP AGREEMENT 



he following items are included in the new ECONO-DEALER's Set-Up Kit: 

1. The ECONO-CAR OPERATIONS AND PROCEDURES MANUAL is the ECONO-DEALER's best 
iend. All facets of the ECONO-DEALER's operation are discussed in depth. All new ECONO- 
EALERS are invited to attend THE ECONO-CAR TRAINING SCHOOL in Elizabeth, New Jersey, 
ere the ECONO-DEALER is taught the Auto Rental Business including the use of all forms and 
^stems. The Operations and Procedures Manual serves as a constant reminder of the things learned 

the TRAINING SCHOOL . Specially trained field representatives provide additional on the spot 
aining and help. 

2. CONSTANT HELPS pour out from the home office in the form of a Newsletter called THE 
ZONO-GRAM. This includes continuing announcements of new Advertising and Publicity which are 
instantly produced by our Advertising Department. 

3. OPERATIONAL FORMS : Enough forms for the first 60 days operation are supplied free of 
large. These include Car Rental Agreements, Qualification cards, Car Control cards. Condition 
jports and many other ECONO-CAR forms used in the ECONO-DEALER's business. 

4. SALES FORMS : These include letterheads and envelopes, display sheets, ad mats, post cards, 
te folders, dresser tents, banners, electric signs, reservation forms, etc., etc. The value of these 
lies items exceeds $500.00. 

5. ANNOUNCEMENT ADVERTISING : ECONO-CAR places and runs at its own expense ads in 
e new ECONO-DEALER's newspaper to prepare the area for the new ECONO-DEALER. 

6. PUBLICITY : Publicity releases are made to the ECONO-DEALER's newspaper of the new 
:ONO-DEALERSHIP. 



SCHEDULE "B" 

OF 

THE ECONO-CAR RENTAL SYSTEM 

ECONO-DEALERSHIP AGREEMENT 

THE ECONO-CAR LEASE PLAN 



In consideration of the granting by ECONO-CAR of the exclusive ECONO-DEALERSHIP outlined 
1 the agreement to which this schedule is attached, it is further agreed as follows: 

1. ECONO-CAR does hereby extend to the ECONO-DEALER the full benefits of the ECONO-CAR 
EASE PLAN. Specifically, the ECONO-DEALER may lease from ECONO-CAR new current model year 
CHRYSLER automobiles, for use in the daily rent-a-car business, at the following monthly rentals: 

Two Door Valiant, Model VIOO $129.00 

Four Door Valiant, Model V200 134.00 

Four Door Dodge Dart 134.00 

Four Door Plymouth Savoy 139.00 

Four Door Dodge 300 142.00 

Plymouth Convertible (V-8) 157.00 

Plymouth Savoy Four Door Station Wagon 152.00 

Four Door Chrysler Newport 162.00 

2. The monthly rentals set forth above shall include the insurance coverage described in the 
:CONO-DEALERSHIP AGREEMENT, as well as all delivery and destination charges. All vehicles 
re to be equipped with automatic transmission, radio, heater, 2 seat belts, and left outside mirror, 
ach lease shall run for a minimum period of twelve (12) months to a maximum of eighteen (18) months. 
, security deposit of $100.00 per vehicle and the first month's rent in advance shall be paid to 
iCONO-CAR with each order. The monthly rentals do not include city, state or local taxes, if any, 
censing or registration charges or fees or inspection fees, if any. The ECONO-DEALER shall exe- 
ute a standard form of ECONO-CAR LEASE AGREEMENT before delivery of any vehicles. 

3. The ECONO-DEALER does hereby place the following order, to be delivered immediately or as 
oon as such vehicles may be mode available for delivery. 

? Two Door Valiants, Model VIOO 
.3. Four Door Valiants, Model V200 
y Four Door Plymouth Savoy Sedans 

The ECONO-DEALER's check in the amount of % 'y^j J^O (in addition to the franchise 

56 provided for in paragraph "2" of the ECONO-DEALERSHIP AGREEMENT), representing security 
eposits of $100.00 per vehicle plus the first month's rent in advance on this order, is included 
'ith this order. 



lated >hC^ '^l. / ^ ^ '3 



ccepted: 

CONO-i:AJR INTERNATIONAL INC. 



By 



'^^i^^ 




I certify that, in connection with the 
preparation of this brief, I have examined Rules 
18, 19 and 39 of the United States Court of Appeals 
for the Ninth Circuit, and that, in ray opinion, the 
foregoing brief is in full compliance with those 
rules. 




Attorney 



No. 22535 & 22535-A 



Mi^y^-n^- ^o 



IHnltcb States Court of Hppeals 
for the Bintb Circuit 



ECONO-CAR INTERNATIONAL, INC., 

VS. 
CARL M. TAUTE, d/b/a ECONO-CAR OF BILLINGS, 



Appellant, 



Appellee. 



CARL M. TAUTE, d/b/a ECONO-CAR OF BILLINGS, 



VS. 
ECONO-CAR INTERNATIONAL, INC., 



Appellant, 



Appellee. 



Appeal from the United States District Court 
for the District of Montana, Billings Division 



Brief of Hppellant Carl flD. XTaute 



JOHN C. SHEEHY, ESQ. 

HUTTON, SCHILTZ & SHEEHY 
402 Electric Building- 
Billings, Montana 59101 
Attorneys for Appellant Taute 

GEORGE C. DALTHORP, ESQ. 

CROWLEY, KILBOURNE, HAUGHEY, HANSON & GALLAGHER 

500 Electric Building 

P. O. Box 2529 

Billings, Montana 59101 

Attorneys for Appellant Econo-Car International, Inc. 

f ■ ' 'r • ■ n 

BILLINGS TIMES PRINT J'^ ^' "' ILI-- W- -^ 

Filed , 1968 

.ftPR.I51?E Clerk 

\flU. B. LUCK, CLERK 



1 

SUBJECT INDEX 

Page 

Citations and Authorities <>.•.<> » . . » . « . . . . ii 

(b) Statement of the Pleadings and Facts . « . . . . » . . . . 1 
Disclosing Federal Jurisdiction ..o 

(c ) Statement of the Case . . » » . . . . 2 

(1) Number of Months for Which Taute Could 

Lease Individual Cars « . . « . « • • « . o « 5 

(2) The Provision for Insurance o » 7 

(3 ) Turn-in Costs for Vehicles « « » . . . o 8 

(4) Advertising « <> • . « o .•.».<>.. o*. ooo .... . 10 

(d) Specifications of Errors. ».<> o*. 13 

(e) Argument of the Case <....•.... 21 

SUMMARY o o , , . o . . a 21 

ARGUMENT „ , , . . 22 

(f ) Appendix 37 



ii 

CITATIONS AND AUTHORITIES 

Page 

Cases : 

Apex Metal Stamp Company v. Alexander & 
Sawyer, Inc. (N.J. 1957) 138 A, 2d 568, 571 ». 31 

Cavanagh v. Borough of Ridgefield (N.Jo 1920) 
109 A o 515 . o o o „ o . . . . 32 

Cruse Vo Clawson (Mont. 1960) 352 P. 2d 989, 994.... 33 

Patco Products v. Wilson (N.J. 1950) 
76 A. 2d 677, 679 o . . o . » „ , . o 30 

Tanenbaum v, Francisco (N.J. 1933) 166 Ao 105...... 32, 33 

Statutes : 

Title 28, Sec. 1332, U.S .C .A o o » 1 

Title 28, Sec 1441(a), UoS.C.A,,o o 1 

Title 28, Seco 1446, U.S.CoA.o o.oo 1 

Sec • 17-301 , Revised Codes of Montana , 1947 o ...... « 30 

Rules: 

Rule 59, Federal Rules of Civil Procedure » . . 1 

Rule 73(a), Rederal Rules of Civil Procedure 2 

Authorities : 

25 C . J ,S . 867 , Damages „ Sec . 78 . . . . „ . o . . . « 34 



(b) Statement of the Pleadings and Facts Disclosing Federal 
Jurisdiction . 

Appeal from the United States District Court for the 
District of Montana, Billings Division. 

The District Court had and has jurisdiction of the 
cause by removal proceedings. Plaintiff originally filed his 
complaint in the District Court of the Thirteenth Judicial 
District of the State of Montana, in and for the County of 
Yellowstone. Defendant removed the cause to the said District 
Court by timely Petition for Removal and Undertaking for Costs, 
each duly served, pursuant to Title 28, Sec» 1446, U.S.C.A . 
The cause was properly removable because it is one of which the 
said District Court would have had original jurisdiction (Title 
28, Sec. 1441(a), U.SoCoA.). 

Said Federal District Court has original jurisdiction 
of the cause by reason of the diversity of citizenship between 
plaintiff and defendant and because the amount in controversy 
exceeds the sum of $10,000.00, exclusive of interest and costs 
(Title 28, Sec. 1332, U.SoC.AJ. 

Judgment in the cause, based upon jury verdict, was made 
and entered on August 16, 1967, in favor of the plaintiff in the 
sum of $l,052oOO on the first cause of action, and $6,000.00 on 
the second cause of action, for a total of $7,052.00. 

Taute timely made and served a Motion for New Trial as 
to the first claim in his complaint (Rule 59, Rules of Civil 
Procedure) o Econ-Car also timely made and served its Motion for 
Judgment Notwithstanding the Verdict or in the Alternative for 
a New Trial « 



Both motions for a new trial were by the Court denied 
on September 18, 1967. Thereafter, within thirty days Econo-Car 
served a Notice of Appeal to this Circuit Court of Appeals (Rule 
73(a) )o Thereafter, within 14 days, to-wit, on October 23, 
1967, the Appellant Taute served and filed his Notice of Appeal 
pursuant to 73(a)(3), Rules of Civil Procedure. 

Accordingly both the Federal District Court from which 
this appeal is taken, and this Appellate Court, had and have 
Jurisdiction in the premises, 
(c) Statement of the Case 

Econo-Car International, Inc., the defendant named in 
the original action, is a corporation organized and existing 
under the laws of the State of New Jersey „ 

Carl M« Taute, the plaintiff in the original action, 
is and was at all times pertinent a citizen of the United States, 
resident of the State of Montana . 

In the month of June of 1963, Econo-Car was engaged in 
the business of car rentals, and for the purpose of promoting 
itself as a national organization, was offering to persons who 
were willing to participate, certain franchise agreements whereby 
the franchisee would rent cars in a certain locality or localities 
under the name and aegis of Econo-Car Rental System. 

Taute, who resided in Billings, Montana, got involved 
with Econo-Car when he answered an advertisement in a local paper 
which offered a franchise of a discount type rental operation 
built on the use of Chrysler automobile products (Tr . 5). Within 
two or three weeks after he answered the advertisement he received 
a telephone call from a gentleman who identified himself as an 
Econo-Car representative and asked for an appointment to meet 



with Taute and his wife, Rayetta. 

At that time Taute was merchandising manager and direc- 
tor of retail operations for Ryan Grocery Company in Billings 
(Tro 26). 

As a result of the phone call Taute and his wife met 
with a Mro Burko, who represented himself as an Econo-Car represen- 
tative responding to Taute 's letter in answer to the ad (Tr o 27) o 
They met in the Esquire Motel in Billings and there Mr, Burko had 
with him a Mr, Alvarez, whom Mr. Burko introduced as being on the 
national sales staff of Econo-Car, being trained for a sales 
position o (Tr, 28) 

Mr, Burko explained to the Tautes that Billings had 
been chosen as one of the towns that could support a car rental 
operation. Using a blackboard he demonstrated to the Tautes how 
they could make a profit on a 15 car operation in Billings, using 
their method, their tools, their resources, and following the 
general instructions to be supplied by Econo-Car (Tr. 29), 

After some other discussion at this first meeting in 
the Esquire Motel, Burko produced a blank form of contract en- 
titled "Econo Dealer Appointment Program and Agreement" which is 
the same as Exhibit 6 in this action. He suggested that the 
Tautes take the agreement home with them to study it and return 
in a few days. He also gave them names of two or three dealers 
with whom they might verify whether Econo-Car was doing the things 
that Econo-Car claimed. No contract was made by Taute with these 
persons (Tr . 33), 

Two or three days later Taute and his wife received a 
phone call from Mr. Burko, and again a meeting at the Esquire 
Motel was arranged. The same persons attended the meeting, Mr, 



Taute, his wife, Mr. Burko and Mr. Alvarez. 

Taute brought with him to this second meeting the blank 
agreement and the list of questions concerning the various clauses 
in the contract . They then proceeded to take the contract item 
by item. The Tautes asked questions and Burko answered them for 
them, (Tr. 34) 

We will not burden this Court with a recitation of what 
happened in that conversation, the representations that were made, 
and the statements that were made by Mr, Burko to induce Taute to 
sign the contract which became Exhibit 6. Since Econo-Car is also 
appealing in this action we expect that we will be called upon to 
make a statement with respect to that conversation in our respon- 
sive brief to Econo-Car and no useful purpose would be served in 
repeating that conversation hereo It is enough to say that even- 
tually the jury determined that Econo-Car, through Mr, Burko, had 
made representations to Taute which turned out to be false and 
awarded him a verdict on the second claim, which related to those 
false representations, 

Taute *s first claim in this action relates to the 
breaches of the contract, Exhibit 6, and the related instruments 
thereafter executed, which resulted in damage to Taute above and 
beyond the damages he sustained by reason of the fraudulent 
deceit of Econo-Car, We will concern ourselves with those 
breaches in this statement of the case . 

When Taute was induced by the deceit of Econo-Car to 
sign Exhibit 6, he nevertheless thought that the contract itself 
would be performed by Econo-Car. Experience proved this to be 
untrue, Taute contends, and the evidence sustains him, that 
Econo-Car breached every important provision of Exhibit 6 and 



the supporting lease, Exhibit 7, in such manner as to prevent 
Taute from continuing in the business, and to drive him out of it, 
because he had no agreement with Econo-Car upon which he could 
rely for the continuation of the rental car business in Billings. 
The following are some examples: 

(1) Number of Months for Which Taute Could Lease 

Individual Cars : 
In Schedule B of Exhibit 6, it is provided in para- 
graph 2: 

»•♦ 4c * Each lease shall run for a minimum 
period of twelve months to a maximum of eighteen 
months* * *o The ECONO-DEALER shall execute a 
standard form of ECONO-CAR LEASE AGREEMENT 
before delivery of any vehicles." 

Taute understood from this language that the option 
would be given to him as to how many months past the minimum 
period he would be allowed to rent the automobile. However, in 
August of 1963, he signed Exhibit 7, which is dated July 10, 1963, 
which provides the option in the Lessor (Econo-Car) as follows: 
"The term of this lease is for a period of 
eighteen months from the date of delivery (see 
attached rider) of the vehicle to Lessee, ex- 
cept that Lessor shall have the absolute right, 
in its sole discretion, to terminate the lease 
at any time following the twelfth month, provided 
that Lessor makes available to Lessee a similar 
replacement vehicle of the then current model 
year, for a like term of eighteen months, and 
at an identical rental* * *," 



Thus by Exhibit 7, which was not displayed to Taute when 
he executed the franchise agreement , it was agreed between the 
parties that the option as to the number of months after twelve 
months for each vehicle would remain in Econo-Caro However, Ex- 
hibit 7 provided for a minimum of twelve months for each automo- 
bile and it further provided that replacements would be made on 
termination of another vehicle for eighteen months. 

These contractual provisions were important to Taute 
because of the property tax situation on automobiles in the State 
of Montana. New cars are not subject to property taxes ^ in the 
first year or year of purchase. Thus a new car brought into 
Montana in 1963 is not subjected to property taxes until February 
15 of the subsequent year, 1964. Knowing this, Taute wanted to 
arrange his rental fleet so as to be able to bring in new cars 
for his rental operation before February 15 of each year. This 
would mean a saving of about $40 per automobile per year;on a 
ten car fleet, the saving would be substantial. 

Taute *s original fleet of ten cars were delivered to 
him by Econo-Car in the month of October and November of 1963 . 
It was Taute 's plan to license them of course for 1963 at the 
cheap no property tax rate; then license them for 1964, paying 
the property taxes ; and then trade them in to Econo-Car between 
January 1 and January 15, 1965. so that he would avoid property 
taxes on the used cars and would not have to pay property taxes 
on the replacements under the Montana tax laws. He was prevented, 
however, from executing this plan because Econo-Car unilaterally 
changed the leasing terms on the number of months he could hold 
the cars. 

Thus in November, 1963, Taute received a "rate revision" 



(Exhibit 9, sheet 3) which provided that effective December 1, 
1963, 

"All 1964 automobiles will be available 

on a twelve month leasing term (instead of 

the previous eighteen). Either party may, 

however , extend the term for up to two 

months* * *," 

The so-called rate revision was put into force by Econo- 
Car unilaterally. Taute was not asked to consent. Taute could 
have lived with this provision, however, because he had an option 
to extend to two months. Econo-Car, however, did not stand by 
this provision. On September 29, 1964, when he had the vehicles 
in his fleet less than a year, he was told that Econo-Car would 
pick up three of his automobiles „ 

On October 5, 1964 (Exhibit 10) he was notified by 
Econo-Car that all 1965 automobiles would be delivered to him on 
a six month lease term, which could be extended by Chrysler leasing 
without Taute 's consent, of one month. Since 1965 automobiles 
were to be replacement for 1964, Exhibit 10 was in direct contra- 
vention of Exhibit 7 which provided that leasing terms for replace- 
ment vehicles would be eighteen months in duration. 

Taute brought the situation to the attention of Econo- 
Car (Exhibit 11, sheet 3) » He informed them of the taxing situa- 
tion and of the desire to trade his cars in in the month of 
January, 1965. He was given no assurance on this particular. 
Econo-Car entirely disregarded the replacement provisions of 
Exhibit 7, the leasing agreement between them. 

(2) The Provision for Insurance ; 

Obviously collision and liability insurance are of 



vital consideration to a person in the case of a rental car busi- 
ness. 

Paragraph 4E of the franchise agreement, Exhibit 6, 
provided : 

"Econo-Car, in consideration of the payments, 
will provide collision insurance *with no more 
than $100 deductible* and physical damage insur- 
ance, including fire and theft and combined 
additional coverages with $50 per loss deductible." 
Under the franchise agreement the insurance was to be provided at 
no additional cost to Taute. 

Yet, on December 26, 1963, Econo-Car unilaterally added 
$5.00 per month per car to the payments to be made by Taute, for 
insurance (PI. Exh. 13). Then on September 2, 1964 (Exh. 13, 
sheet 2) Econo-Car informed Taute that they were changing the 
collision insurance coverage from $100 deductible to $250 deduc- 
tible. This had the effect of increasing Taute 's risk on the 
automobiles in his fleet from $1,000 to $2,500 with the automo- 
biles that he had on the road. 

Taute addressed a letter to Econo-Car (Exh. 14) asking 
if the $250 deductible collision coverage was mandatory. Taute 
was emphatically informed by Econo-Car that it was mandatory 
(Exh. 14, sheet 2) . 

(3) Turn-in Costs for Vehicles : 

Another important element of the leasing agreements 
was the turn-in cost that was to be assessed Taute for wear and 
tear on the leased vehicles • 

Under the franchise agreement nothing was stated in 
Schedule B of Exhibit 6 with respect to turn-in costs. However, 



that agreement did say that a "standard form agreement would be 
executed before the delivery of any car." 

The lease form which was executed between the parties 
is Exhibit 7. Paragraph 11 of that agreement provided: 
"Upon the expiration of this lease, 
* * *, Lessee shall deliver to Lessor or 
its designee the vehicle, including five 
(5) usable tires, as well as any extra 
equipment of the vehicle* * * and is as 
good condition as when delivered, ordinary 
wear and tear and bona fide rent-a-car 
business excepted* * *o Tire costs shall 
be restricted to bald or missing tires," 
Thus the provisions of Exhibit 7 confirmed Taute's understanding, 
to-wit, that ordinary wear and tear were not his respondibility 
and that he would not receive charges for tires unless they were 
bald or missing » His understanding was confirmed by Exhibit 8, 
apparently provided by Chrysler Leasing Corporation with respect 
to inspection of leased vehicles » In that exhibit ordinary stone 
chips, bumps or scratches or minor dents would be excepted, and 
tire wear would not be considered a lessee responsibility unless 
it was evident he had failed to maintain proper alignment of the 
front wheels o 

When Taute turned in his first automobiles, at the 
request of the Lessor, he was assessed for charges on the condi- 
tion of the automobiles that were not within the leasing agree- 
ment » He protested to Econo-Car (Exhibit 12) and the matter 
was satisfactorily taken care of for Taute. However, again 
unilaterally, Econo-Car proposed changes in the lease terms with 



respect to turn-in conditions (£xh . 16) o Again these changes were 
unilateral and in contravention of the provisions of Exhibit 7. 

(4) Advertising ; 

Again it is obvious that advertising is an important 
part of the rental car business « Provision was made for adver- 
tising in the franchise agreement » 

Paragraph 4F of the franchise agreement provided that 
Econo-Car would pay each dealer, in this case Taute, an adver- 
tising allowance of $7.50 per month per automobile operated by 
him provided that Taute advertise locally a minimum amount of 
$15.00 per car. Having Taute handle the advertising on a local 
basis was advantageous because they avoided national advertising 
rates in that manner <, 

The advertising arrangement went through a variety of 
changes, all unilaterally instituted by Econo-Car « 

In Exhibit 15 Taute was called upon to handle the 
advertising through an advertising agency selected by Econo-Car, 
though the advertising would still be on a local basis , 

On August 31 (PI. Exh. 18) Econo-Car postponed all ad- 
vertising for the entire month of September. On November 4, 1964, 
Taute received Plaintiff's Exhibit 20, which informed him that 
Econo-Car was instituting a 25% reduction in costs, including 
its advertising schedule, and that it would advertise only on 
75% of Taute 's fleet, in effect cutting down the Econo-Car budget 
from 10 cars to 7i cars. This had the effect of reducing the ad- 
vertising by 25% per month. 

Taute felt that the reduced advertising was affecting 
his business and requested additional advertising subsidy from 
Econo-Car, but was refused. Eventually the company went back to 



its original advertising deal, but after Taute had submitted his 
letter terminating the contract and franchise agreement o 

THE FOREGOING examples are given to show that the fran- 
chise agr««Bient, Exhibit 6, and the lease agreement for automobiles 
Exhibit 7, had no real meaning to Econo-Car, and it changed the 
provisions of those agreements whenever it felt inclined. Taute 
in the meantime was struggling to make his rental car operation 
in Billings a success. He perceived that a substantial source of 
rental car business would be from persons using the Billings air- 
port, and accordingly made arrangements to bid, and did bid suc- 
cessfully on a location in the airport terminal in Billings. 
Before he effectuated the lease for the airport facilities, how- 
ever, Econo-Car was undergoing such drastic changes in its method 
of operation in the fall of 1964 that it became apparent to Taute 
that he could not rely on any of the provisions of his franchise 
agreement or the leasing agreement, and that he really had no 
definite contract, as far as Econo-Car was concerned, which would 
tell him where he stood with respect to the future in the rental 
car business o Cost after cost was being passed on to ' 'ute by 
Econo-Car and with each additional cost his margin for success 
was being substantially reduced. So it was then when Econo-Car 
proposed to change the turn-in provisions so as to increase the 
cost to Taute he determined that it was the straw that broke the 
camel's back and served his letter of termination of the fran- 
chise agreement (Exh. 21). Taute illustrated his difficulty, 
using a Valiant automobile as an example (Tr. 105, et seq.) and 
set forth his difficulty: 

"Qo Now then, with respect to the time when 

you were coming up to the point where you were 



going to — where you decided you had to 
eliminate or get out of this business, what 
additional costs were you facing now with 
respect to this Valiant? 

A o I was facing increased costs in the 
area of tires ; increased costs in the area 
of car condition at turn-in time; increased 
costs of maintaining more expensive equipment 
than I had originally bargained for; increased 
tax cost on this more expensive equipment and — 
let's see there was — 

Q« Well, you had the problem about the 
deductible, did you not? 

Ao And increased costs in the event of an 

accident." 

(Tro 108, Lines 10-18) 

Taute was in the car rental business for £cono-Car 
from October 23, 1963, until February 15, 1965. In this period 
of time he ran the business entirely, devoting many hours per 
day to it. He had the managerial responsibility, the promotional 
responsibility, the advertising responsibility, the collection 
work, the contract negotiations and the dealing with Econo-Car. 
He delivered cars, washed cars, and made minor repairs » His wife 
worked with him in the business (Tr, 113). 

In the time that Mr. Taute was involved with the dealer- 
ship, he sustained an operating loss of $2,521.56; and he con- 
tributed $8,934.00 in investment, not considering the franchise 
costs, to the venture (Tr. 124). In addition, at the time that 
he signed the franchise agreement, his employment with Ryan 



Grocery showed him capable of earning the sum of $15,000 per year. 

These are the sums that Taute lost; yet, under the in- 
structions of the Court the jury was so limited that it could 
bring in nothing more than $1,052.00 on Taute *s claim in his 
favor. Manifestly this result iB unjust, 
(d) Specifications of Errors 

1. The trial court erred in instructing the jury 
as follows : 

"Now with respect to the breach of con- 
tract, the plaintiff says that the contract, as 
explained by the evidence which was introduced, 
was violated by the defendant, and he complains 
in these respects: One, that the provision of 
the contract with respect to advertising were 
violated ; two , that the provisions of the con- 
tract with respect to insurance were violated, 
and, three, that the defendant changed the leasing 
agreement for the automobiles to be used by the 
plaintiff and thereby increased the cost to the 
plaintiff. 

"The plaintiff has failed to prove that the 
advertising agreements were not honored, and 
therefore he may recover no damages on that 
account . 

"With respect to the change in the insurance 
program you are instructed that it was the duty 
of the defendant to provide, without charge, 
collision insurance with one hundred dollar 
deductible. And I am satisfied that you know 



what a deductible policy ISo Simply means 
that In the event of a collision and damage 
the Insurance company does not pay the first 
hundred dollars. Now, unless you find that 
the defendant proposed an Insurance change 
to which the plaintiff consented, and this 
could be proved by an oral agreement, as well 
as by letters or writings, then you may award 
the plaintiff the damage which he sustained. 
This damage would be measured by the premium 
charged for the months it was charged, plus 
the difference between the value of a colli- 
sion policy with a one hundred dollar deduc- 
tible clause and a policy with a two hundred 
fifty dollar deductible charge. This again 
spread over the months that the two hundred 
fifty dollar deductible policy was in force 
prior to the termination of the contract 
which was on February 15, 1965. 

"With respect to the claimed breach of the 
leasing agreement, in this connection I instruct 
you that unless the plaintiff proposed a change 
to which the defendant agreed, then it was the 
duty of the defendant to provide automobiles 
to the plaintiff for a period of eighteen 
months after the initial dates of delivery. 
In this connection nine cars were delivered 
on October 23 , 1963 , and one car on November 1 , 
1963. Now, if you find that by reason of the 



changes in the lease terms, and specifically 

I refer to the length of the term of leasing 

or the turn-back provisions, and again I 

instruct you that it is necessary that these 

changes be not consented to by the plaintiff, 

and if you find that he suffered damages, 

then you may award him such damage as you may 

find from the evidence that he did suffer . 

In this connection, however, I should advise 

you that the defendant's obligations under 

exhibit six and seven expired within a few 

days of April 30, 1965, and so any change 

in leasing arrangements wouldn't be — you 

couldn't consider any damages based upon a 

projection beyond that timeo" 

(Tro 283, Lines 1-25; 
284, Lines 1-22 inc.) 

To which the plaintiff made objections as follows : 

"With respect to Instruction Number Two. 

That portion thereof which states that the 

plaintiff is not entitled to recover because 

the advertising agreements were not honored 

is not true and is not founded on the evidence . 

There being evidence that there were months 

in which no advertising was performed and 

other months in which it was performed in a 

manner different than the contract. And again 

an invastion of the province of the jury with 

respect to that particular portion. That 

-15- 



there is no evidence upon which the jury 
can determine the difference in value 
between the collision policy and one hundred 
dollar deductible and one of two hundred 
fifty dollar deductible. 

"That the third portion of the Court's 
Instruction Number Two relating to the change 
in the leasing agreement does not take into 
account the fact that under exhibit seven, 
if it were a valid, modified contract existing 
between the parties, would require the replace- 
ment vehicles to be of eighteen months term, 
and that the position the plaintiff found 
himself in on November 15, 1965, was that 
despite the provisions of exhibit seven the 
vehicles were coming to him on a six month 
term on an agreement which — under an arrange- 
ment to which he had not consented. That the 
proposed instruction does not take into account 
the fact that the plaintiff in this case, Mr, 
Taute, at the time he terminated the arrange- 
ment was faced with a situation of accumula- 
tions in the leasing agreement were such that 
all taken together they were so material and 
interdependent as to constitute a violation of 
the whole contract by Econo-Car that he had a 
right then to recover for the breach of the 
whole contract and not simply limited as the 
Court's Instruction Number Two limits him to 



follows i 



damages for breaches, for particular 
breaches of the contract. That instruction, 
again, is not the proper instruction on the 
measure of damages as far as breach of the 
contract is concerned, because he was en- 
titled to recover all of the loss to which 
he has been put under — is entitled to recover 
such amount that would compensate him for all 
of the detriment approximately caused by the 
whole breach of the contract by Econo-Car, 
and the jury is not so instructed. As such 
the Court is not instructing the jury on 
plaintiff's theory of the case, or is instruc- 
ting it in an incomplete and insufficient 
manner and is invading the province of the 
jury with respect to the right of recovery in 
the case." 

(Tr„, 272, Lines 4-25; 
273, Lines 1-19 inc.) 

And to the further objection of the plaintiff as 

"Also object to the failure of the Court 
to instruct on the element of damage on out- 
of-pocket rule, and asks the Court to so instruct 
the jury. 

"Object to the statement that the obliga- 
tions of the defendant expired on April 30, 
1965, for the reason that it ignores the 



eighteen month replacement provision in 

exhibit seven." 

(Tro, 285, Lines 24-25; 
286, Lines 1-5 inc.) 

2o The Court erred in failing to give Plaintiff's 

Offered Instruction Noo 13, after a request therefor by the 

plaintiff, in words and figures as follows: 

**You are instructed that the measure of 

damages for a breach of contract is such 

amount as will compensate the party aggrieved 

for all of the detriment proximately caused 

thereby, or which in the ordinary course of 

things would be likely to result therefrom." 

3. The Court erred in failing to give Plaintiff's 

Offered Instruction Noo 16, in words and figures as follows: 
"In determining the amount of damages, if 
you find from a preponderance of the evidence 
and under these instructions that Taute is en- 
titled to a verdict, you should consider, allow 
for, and make just compensation for the moneys, 
if any, laid out and expended by him as capital 
contributions to or expenses incurred for the 
operation by him of the Econo-Car business , 
less any value accruing to Taute from such 
operation or business. 

"You should also consider, allow for and 
make just compensation for the reasonable value 
of the services and time expended by him in 
the operation of the Econo-Car business which 



you find from a preponderance of the 
evidence was brought about by the mis- 
representations of the defendant or by 
breaches of contract, if any, by Econo-Car. 

"If you find from the evidence that 
after Taute brought the operation of the 
Billings Econo-Car business to a halt he 
was thereafter forced to undergo a period 
of enforced idleness which was proximately 
caused by the actions or omissions of the 
defendant Econo-Car under the evidence and 
instructions in this case, you should award 
him the reasonable value for the earnings 
he might reasonably be expected to earn 
otherwise during such period of enforced 
idleness • 

"The amount sued for in the complaint 
should not be taken by you to be a criterion 
of the amount of your verdict for the plain- 
tiff . You should set your award, if any, 
in the full amount that you find from a pre- 
ponderance of the evidence, but in no event 

shall your award exceed the sum of $ , 

the amount sued for in this action." 

4. The Court erred in failing to give Plaintiff's 

Offered Instruction No. 12, after request therefor by the 

plaintiff, in words and figures as follows: 

"If you find from a preponderance of the 
evidence that Taute was induced to enter into 



the contractual relationship with Econo- 
Car by virtue of the misrepresentations, if 
any, of Mr. Burko and Mr, Alvarez, then 
Taute, under the law, had the right to elect 
to continue performance of the remainder of 
the contract on his part, and he is not 
thereby deprived of his right to recover 
from £cono-Car for the damages, if any, 
which were proximately caused him by such 
misrepresentations. Such an election to 
continue the contract by Taute would have 
the effect of requiring both parties to 
perform the conditions required of them 
under the remainder of the contract. 
Thereafter, if Econo-Car were guilty of 
further breaches of the contract, and you 
find from a preponderance of the evidence 
that such breaches, though not so large by 
themselves, when taken together were so 
material and interdependent as to constitute 
a violation of the whole contract by Econo- 
Car, then Taute had the right to treat the 
whole contract as breached, and to recover 
from Econo-Car such damages as the law 
allows o" 
5o The Court erred in entering its Order dated 

September 18, 1967, denying plaintiff's Motion for a New 

Trial as to the First Claim. 

-20- 



6. The Court erred in refusing Plaintiff's Offer 
of Proof Number Two, in words and figures as follows: 
"MR. SHEEHY: This is offer of proof 
number two, Plaintiff's Offer of Proof 
Number Two, 

"Comes now the plaintiff and offers to prove 
by the witness, Carl Taute, now on the stand, 
and if allowed to testify his testimony would 
prove that in Billings at the Esquire Motel 
in the month of June of 1963, in the presence 
of Mro Alvarez and in the presence of Carl 
Taute and Mrs. Taute, Mr. Burko projected for 
Mr. Taute the income that he might be able to 
expect from the operation of a franchise arrange- 
ment under the Econo-Car System in Billings such 
as was being proposed to Mr. Taute at that time, 
that the projection for a fifteen car operation 
was the sum of one thousand dollars per month 
per car, and that for a ten car operation the 
income per month per car would be somewhat 
less, but that he might expect to build to a 
thousand dollars per month in short order, in 
words to that effect ; that this statement was 
made unsolicited by Mr. Taute; was made for 
the purpose of explaining to him what the 
possibilities were as to income under this 
arrangement, and as part of the whole conver- 
sation which led to the conversations — I 
should say which led to the signing of the 



contract on or about June 28, 1963. And 
we so offer this testimony in evidence. 

*'THE COURT: Do you have any objections 
to that offer of proof? 

"MRo DALTHORP: Yes, Your Honor; first one 
being that it is outside of the scope of the 
pleadings. Secondly, that it is pure dealers* 
talk in the sellinf of a franchise. Third, 
that it is offered to vary the terms of a 
written contract, and forth, that it is a 
promise as to future events which, if at all, 
was made prior to the execution of a written 
contract purporting to combine all of the 
agreements of the parties and actually, I 
don't think, even as stated, that it was in 
the terms of a promise, but a general represen- 
tation. 

"THE COURT: The objections are sustained." 

(Tr. 120, Lines 22-25; 
121, Lines 1-25; 122, 
Lines 1-5 inc.) 



-50R- 



(e) Argument of the Case 
SUMMARY : 

The jury by its decision found that Econo-Car had 
breached the franchise agreement in several respects. The jury 
awarded all the damages it could award under the limited instruc- 
tions of the Court . 

The Court's instructions prevented Taute from recover- 
ing a proper measure of damages for the breach of the contract 
in this case . 

The franchise agreement provided that it was to be 
construed and enforced according to New Jersey laWo New Jersey 
follows the common law rule that recoverable damages for breach 
of contract are such as may reasonably be supposed to be in the 
contemplation of the parties at the time they made the contract. 
New Jersey allows as a measure of damages for breach of contract 
such amount as will compensate the party aggrieved for all the 
detriment proximately caused by the breach, or which in the 
ordinary course of things would be likely to result therefrom. 

The evidence showed the plaintiff to be out-of-pocket 
under the franchise agreement the following amounts : 

Contributions to capital $8,934.00 

Operating Loss 2,521 .56 

Total $11,455.56 

The foregoing total does not include the $6,000,00 
Taute paid as a franchise fee, nor does it include anything for 
the reasonable value of his services in the time that he was 
employed in trying to make the franchise work. 

The several breaches of contract by Econo-Car were 
such as to make the whole franchise agreement wholly impossible 



to Taute, and to prevent his performance of the franchise agree- 
ment o 

The Court by its instruction limited damages for 
breaches and the small dollar amounts flowing out of those 
breaches, without regard for the fact that the breaches collec- 
tively, and interdependently, had a cumulative effect of breach- 
ing the whole contract . 

The result is that the plaintiff Taute is unjustly and 
inadequately compensated for the damages which he sustained by 
virtue of Econo-Car's breaches. The decision on the First Claim 
should be reversed and sent back for a new trial on the issue of 
damages • 
ARGUMENT ; 

Plaintiff Taute filed his complaint against Econo-Car 
alleging two claims for recovery, one based upon fraudulent in- 
ducement to enter the franchise agreement , and the second for 
breaches of the franchise agreement by Econo-Car which damaged 
him. 

The Court submitted both claims to the trial jury for 
decision. The jury found that Econo-Car was indeed guilty of 
fraudulent representations in inducting Taute to enter into the 
franchise agreement and awarded Taute $6,000.00 on that claim, 
the limit fixed by the Court. 

The trial jury also brought in its verdict of $1,052.00 
Thus the jury also found that Econo-Car was indeed guilty of 
breaches of the contract into which it had fraudulently led Taute 
The jury, however, by the court's instructions, were limited to 
small dollar amounts because the court made the several breaches 
independent instead of interdependent , The court ignored the 



cumulative effect of the breaches and the fact that they forced 
Taute out of his franchise agreement o The jury in effect awarded 
everything it could award under the court's instructions on the 
second claim. 

The Court's position ignored the fact that the continu- 
ing and respective breaches of the contract had put Taute in the 
position where he could not go forward with the franchise arrange- 
ment. Taute's testimony is clear on this point: 

"Qo Now then with respect to the time when 
you were coming up to the point where you were 
going to — where you decided you had to eliminate 
or get out of this business, what additional costs 
were you facing now with respect to this Valiant? 

A. I was facing increased costs in the area 
of tires ; increased costs in the area of car 
condition at turn-in time; increased costs of 
maintaining more expensive equipment than I had 
originally bargained for; increased tax cost 
on this more expensive equipment, and let's see 
there was — 

Q. Well you had the problem about the deduc- 
tible, did you not? 

Ao And increased insurance costs in the 
event of an accident . 

Q« Now the price you were paying for the 
Valiant was a hundred fifteen fifty at this 
time as compared to a hundred twenty-nine 
dollars? 
A « Yes . 



Q. Did that price Itself have any com- 
pelling effect on you with respect to continue 
staying in the business? 

Ao No, I didn't feel that it was enough 
to Justify the increased risks we were taking — 
enough of a reduction, 

Q« Did you then eventually decide to 
terminate your relationship with Econo-Oar? 

(Tr, 108, Lines 6-25; 
109, Lines 1-4) 

A good exaiuple is the Court's charge with respect to 
the changes in insurance. The Court charged the Jury in the 
instruction to which we have objected, that the damage for the 
insurance changes would be "measured by the premium charged for 
the month it was charged plus the difference between the value 
of a collision policy with $100 deductible and a policy with 
$250 deductible charge »" (Tr« 283, 284) The Court limited 
damages on this item to the termination of the contract on Feb- 
ruary 15, 1965 (Tr, 284), 

Thus in its charge, under the evidence the Jury could 
award to Taute a small dollar amount, amounting to approximately 
$5o00 per month from December 26, 1963 (PI. Exho 13) to February 
15, 1965, the date of the termination of the contract, a period 
of something over fourteen months. 

Would such a sum adequately compensate Taute for the 
damage done to him by virtue of the breach of the insurance cove- 
nants and the franchise agreement? Obviously not. The increase 
in dollar cost was not the real damage to him; it was the increase 



risk that he was facing with every car that he placed on the road 
in the rental market. Where formerly he was at risk for $100 for 
each car, that risk increased to $250 for each car. On his ten 
car fleet it meant that he had a possible $2,500 of risk for 
accidents on his rental cars as opposed to a $1,000 possibility. 
As a businessman, Taute had to make a determination whether he 
could afford to take the risk of losing that additional money 
any time an accident occurred to any car. Awarding him the 
difference in premium between a $100 deductible and a $250 deduc- 
tible policy does not adequately remedy the breach. The breach 
of the insurance contract had the effect of making Taute 's con- 
tinued operation of the franchise a quite risky matter to him« 
In Exhibit 6 Econo-Car had agreed to provide him with $100 deduc- 
tible collision insurance cost-free to Taute, Instead it was 
supplying him with a $250 deductible insurance policy at a cost 
of $60,00 per year per car additional to Taute, The breach was 
not only material to the premium cost to Taute ; it was material 
to the whole franchise agreement. Yet, the Court's instructions 
prevented him from making a recovery against the defendant for 
all of the damages he suffered by virtue of the breach of the 
whole franchise agreement . 

A second breach of the franchise agreement which materi- 
ally affected the whole franchise as far as Taute was concerned 
was the number of months that he could depend on for having each 
individual car in his possession. 

The only agreement affecting the length of time that 
the cars were to be in the possession of Taute was Exhibit 7, 
the lease agreement , Under the caption "Term" that agreement 
provided : 



"2. The term of this lease is for a 
period of eighteen (18) months from the 
date of delivery SEE ATTACHED RIDER of the 
vehicle to the Lessee, except the Lessor 
shall have the absolute right, in its sole 
discretion, to terminate the lease at any 
time following the twelfth month, provided 
that Lessor makes available to Lessee a 
similar replacement vehicle of the then 
current model year for a like term of eight- 
een months, and at an identical rental* * *." 
Exhibit 7 was in full force and effect between the 
parties. Its provisions were never amended or rescinded by the 
mutual consent of both parties. However, its provisions were 
totally ignored by Econo-Car « Yet this is the only agreement 
between the parties under which Econo-Car made delivery of auto- 
mobiles to Taute. 

It is clear from the provisions of Exhibit 7 above 
quoted that Econo-Car could not terminate the lease of any car 
within the twelve month period after delivery; it is further 
clear that between the twelfth month and the eighteenth month it 
could so terminate the term as to any individual car but it had 
to make available to Lessee a similar replacement vehicle of the 
then current model year for a term of eighteen months and at iden- 
tical rental o 

Thus Econo-Car's agreement was to provide each vehicle 
for at least twelve months; its further agreement was that if it 
took the vehicles between the twelfth and the eighteenth month it 
would provide a similar vehicle at identical rental for an addi- 



tional eighteen months. 

No other reading of the lease term is possible without 
doing violence to the language of the instrument between the 
parties, Exhibit 7, 

Yet the Court, in the instruction to which Taute has 
objected, told the jury that Econo-Car*s obligations under Exhi- 
bits 6 and 7 expired within a few days of April 30, 1965. Mani- 
festly this date was incorrect. The Court in its charge correct- 
ly stated that nine cars were delivered to Taute on October 23, 
1963, and one car on November 1, 1963 (Tr. 284). Under the ex- 
press terms of Exhibit 7 if Econo-Car intended to pick up the 
automobiles after one year, that is, after October 23, 1964, 
it would have to provide Taute with an identical car under iden- 
tical terms for an additional eighteen months. None of this was 
done. The additional eighteen month period would have carried 
over until April of 1966, a year later than the Court's instruc- 
tion provided. 

Under Schedule B attached to Exhibit 6, in paragraph 2 
of that schedule, it was set forth as an essential part of the 
franchise agreement that "each lease shall run for a minimum 
period of twelve (12) months to a maximum of eighteen (18) months. 
Under Exhibit 6, therefore, any lease offered to Taute should 
have been for a minimum twelve months with a maximum of eighteen 
months. What did Econo-Car do in this connection? The record 
is replete with Econo-Car *s proposals to Taute for leases on a 
six month basis on a take-it-or -leave-it basis (Exhibit 10; sheet 
3, Exhibit 9; sheet 2, Exhibit 11; Exhibit 16); and moreover, 
at no time did Econo-Car recognize any obligation to Taute to 
replace his vehicles with identical vehicles for an eighteen 



month term under Exhibit 7 . 

These were important matters to Taute . Under the Mon- 
tana taxing laws if a car is licensed in December it must be re- 
licensed again in January or February, and at the second licensing 
a personal property tax is collected. It meant the difference of 
about $40 per car per year on the more expensive cars (Tr. 58,59). 

Taute wanted to arrange the scheduling of the replace- 
ment vehicles so that he could take advantage of the tax laws 
and save the property tax on each car. If an arrangement could 
be made so that he would get new cars between January 1 and Feb- 
ruary 15 in each year, he would have to pay only a new car tax 
on each vehicle and avoid the property taxes when re-licensing 
time came around the following year. 

It is obvious under the evidence that the provision for 
the lease term in Exhibit 7 and in Exhibit 6 meant nothing to 
Econo-Car. It did not feel bound by any provision requiring a 
twelve to eighteen month lease for each individual car. The 
matter of this breach of course was material to the whole con- 
tract as far as Taute was concerned. Yet, under the instruction 
of the Court no damage on this item could be found for Taute. 
Certainly, if any provision was material to the franchise agree- 
ment, the lease term on the rented automobiles was a material 
provision. It went to the heart of the contract. The trial 
court did not recognize this, however, and did not agree that a 
breach of the lease term provisions might constitute a breach of 
the whole contract and entitle Taute to all of the out-of-pocket 
damages that he sustained by virtue of such breach of whole con- 
tract . 

What we have said with respect to the lease term 



provisions of Exhibit 6 and Exhibit 7, also pertains to the turn- 
in provisions of those instruments . We speak now of the cost 
that would be accruing to Taute on damages to rental vehicles 
for which he might be assessed at the termination of the lease, 
when the individual vehicles were returned to the lessor, Econo- 
Car. (There is much reference in the evidence to Chrysler Leasing. 
Apparently Econo-Car had an arrangement with Chrysler Leasing 
under which it got automobiles and supplied them to its franchi- 
sees. Chrysler Leasing was blamed for much of the difficulty 
that Taute was facing with respect to turn-in provisions and 
other provisions of this contract. That, however, was not Taute 's 
problem; it belonged exclusively to Econo-Car). 

Under the original turn-in provisions of Exhibit 7 
(paragraph 11, Exhibit 7) Taute was not to be assessed for any 
condition of the returned vehicle due to ordinary wear and tear 
and he would be assessed for tires only if they were bald or 
missing. We have already set forth for the Court in pages 8, 9 
and 10 of this Brief how substantially those provisions were ig- 
nored and changed by Econo- Car. It is enough to say at this 
juncture that as far as the contractual provisions of Exhibits 6 
and 7 were concerned, Taute stood on shifting sands. He had no 
way of prognosticating what his turn-in costs were going to be. 
He knew from his experience with the car that he had turned in 
that he would be assessed for costs not properly belonging to him. 
His margin of safety in doing business was being substantially 
reduced. Here again there was a breach of the contractual fran- 
chise arrangement which had the effect of driving him out of 
business. But under the Court's instruction on breach of con- 
tract, Taute could recover nothing for this most substantial breacl: 



This case was tried in Montana where ordinarily the 
Federal Court, under Erie , would apply the Montana law. However, 
the franchise agreement, Exhibit 6, provided in paragraph 15 
thereof, that "this agreement shall be construed and enforced 
in accordance with the laws of the State of New Jersey* * ♦." 

There is, however, no substantial difference between 
the damages under New Jersey law for a breach of contract, and 
that of the State of Montana . 

Montana has a statutory provision which says : 

"17-301. (8667) Measure of Damages for 
Breach of Contract . For the breach of an 
obligation arising from contract, the 
measure of damages, except where otherwise 
expressly provided by this code, is the 
amount which will compensate the party ag- 
grieved for all the detriment proximately 
caused thereby, or which, in the ordinary 
course of things would be likely to result 
therefrom." 

Sec. 17-301. Revised Codes 
of Montana, 1947 . 
Taute offered the Court an instruction (Plaintiff *s 
Offered Instruction No. 16) expressly phrased in the language 
of this statute. The court refused to give it (Specification 
of Error No. 2, page 18 of this Brief). 

The New Jersey law supports the proposed instruction. 
In Patco Products v. Wilson (N. J., 1950), 76 A. 2d 677, 679, it 
was stated : 



♦«* « ♦ Thus was the defendant's breach 
accentuated and emphasis given to the common 
law rule that the recoverable damages are 
such as may reasonably be supposed to be in 
the contemplation of the parties at the time 
they made the contract (citing cases)* * *." 

And in Apex Metal Stamp Co. v. Alexander & Sawyer, Inc . (N, J. 

1957) 138 A. 2d 568, 571, the New Jersey court said: 

"The defendant's argument that plaintiff's 
damages were uncertain and insufficient so 
as to preclude an award is without merit. 
In discussing this question it is necessary 
to distinguish between uncertainty as to the 
fact of damage and uncertainty as to its amount. 
See 5 Williston, Contracts (Revised Edition 
1937) Sec. 1346, page 3778; 5 Corbin, Contracts 
(1951), Seco 1022, page 119; Restatement, 
Contracts, Sec„ 331(1), page 515, comment (a) 
(1932); Annotation 'Uncertainty as to Damages' 
78 ALR 858 (1932) . The facts in the instant case 
clearly establish that damage did result; the 
amount of the loss may be calculated with 
reasonable certainty, though not precisely. 
Where it is certain that damage has resulted 
and the evidence affords a basis for estimating 
the damage with some degree of certainty, re- 
covery is allowed (citing cases)." 

138 A. 2d, page 571 



Furthermore in New Jersey, where a plaintiff was pre- 
vented from performing his part of a contract through the fault 

of the defendant, the New Jersey court allowed recovery of 

/\{i ACT/ CAj 
damages. The case involved i^t. i; u » \ ia sfsft against a municipality 

for work done and materials furnished under a contract, but the 
principle is the same. That case is Cavanagh v . Borough of Ridge- 
field (No J. 1920) 109 A. 515. 

The Cavanagh case, supra, is analagous to the case at 
bar for another reason. In this case plaintiff Taute wrote a 
letter terminating the contract (£xh. 21) pursuant to the pro- 
visions of the franchise agreement . Defendant contended that 
this was in effect a waiver of any damages. In Cavanagh , how- 
ever, it was contended that the plaintiff had consented to a 
rescission of the contract because he had notified the defendant 
**you have stopped us and refuse to pay; very well we submit a 
claim for what we have done". The New Jersey court held that 
this was not technically a rescission but merely an acceptance 
of the situation which was brought about by the fault of the 
defendant. The court approved the action of the trial judge 
in charging the jury accordingly. (109 A. at page 516, 517) 
In Tanenbaum v. Francisco (N.J. 1933) 166 A. 105, 
in the syllabus written by the court it is stated : 
"It is well settled that, whenever one 
party to a contract prevents the other from 
carrying out the terms thereof, the other 
party may treat the contract as broken and 
abandon it, and is entitled to such profits 
as he would have received had there been a 
complete performance. Such abandonment 



is not a rescission of the contract, but is 

merely an acceptance of a situation created 

by the wrongdoer." 

Under the New Jersey law then it is clear that one who 
is prevented from performing a contract may claim a breach of 
the whole contract. In th<E5case the defendant's actions with 
respect to turn-in costs and lease term, and indeed for adver- 
tising and insurance, were such that Taute was entitled to treat 
the contract as broken and to abandon ito 

Moreover, under Tanenbaum , plaintiff should have been 
allowed to prove the profits which he might reasonably have ex- 
pected to receive. In Exhibit 22, there is set forth an expec- 
table profit per car from Econo Dealers' Reports of $67.00 per 
month per automobile. Plaintiff moreover made an offer of proof 
(Offer of Proof Number Two, Tr. 120) which related to a represen- 
tation by Mro Burko, the agent of Econo-Car , that in a ten car 
operation the result in income to Taute would be $1,000 per month. 
We have assigned as a specification of error No. 6, the refusal 
of the Court to allow Taute to prove profits which were reason- 
ably ascertainable, both under Exhibit 22, and the Offer Of Proof 
Number Two. The profits, we would expect, would include the 
reasonable value of the services that Taute provided in the 
venture, along with his wife Rayetta . 

Damages for loss of profits, therefore, may be recovered 
in New Jersey, and in Montana as well, where it is shown that such 
loss is the natural and direct result of the act of the defendant 
complained of, and that the amount is certain and not speculative. 
See Cruse v. Clawson (Mont. 1960) 352 P. 2d 989, 994. 



This Court has before it a situation where the plain- 
tiff Taute, prevented from performing the franchise agreement 
that he thought he had, without fault on his part, has been de- 
prived of the damages to which he was put by the acts of the 
defendant. He comes to this Court seeking redress for the in- 
equity of the verdict in the light of his damages. 

We close our argument by pointing to the language in 
25 C.J.S. 867, Damages, Sec. 78 , as follows: 

"Where, without fault on his part, one 
party to a contract who is willing to perform 
it is, by the other party prevented from doing 
so, he is entitled to be placed in as good a 
position as he would have been had the contract 
been performed . The primary measure of damages 
is the amount of his loss, or, as it has been 
otherwise expressed, the value of his contract, 
see supra Sec. 74, which may consist of two 
items, the one being the party's reasonable 
outlay or expenditure toward performance, 
deducting however in computing the damages, 
the value of the materials on hand, and the 
other the anticipated profits which would have 
derived from performance. When a plaintiff 
sues on a contract to recover the amount he 
would have received for the full performance 
prevented by defendant's breach, he seeks in 
effect to recover as damages the profit from 
performance of the contract, which profit 
defendant's breach prevented him from earning* * *." 



We therefore respectfully submit that in view of the 
inadequacy of the verdict, which was directly the result of the 
refusal of the trial court to instruct properly the jury with 
respect to damages that plaintiff is entitled to have the case 
returned for further trial on the issue of damages with respect 
to the First Claim of his Complaint. 

Respectfully submitted, 




»roim c/i SHEEHY 

Of dgunsel for Appellant/ Taute 



BUTTON, SCHILTZ & SHEEHY 
403 Electric Building 
Billings, Montana 59101 
Attorneys for Appellant, Taute 



-35- 



CERTIFICATE 

John C. Sheehy , an attorney duly authorized to 
practice in the United States Court of Appeals for the Ninth 
Circuit, states as follows: 

I certify that, in connection with the preparation 
of this brief, I have examined Rules 18 and 19 of the United 
States Court of Appeals for the Ninth Circuit, and that in my 
opinion, the foregoing Brief is in full compliance with those 
rules . ^ 



JOfflflfcT Sheehy, AttorneyUfor 
Appy^lant, Taute. 



CERTIFICATE OF MAILING 
I hereby certify that on the /^^^ day of April, 
1968, I deposited in the Post Office at Billings, Montana, in 
an envelope securely sealed, with postage thereon prepaid, 
three copies of the within and foregoing Brief of Appellant 
Taute, addressed to George C. Dalthorp, Esq., Crowley, Kil- 
bourne, Haughey, Hanson & Gallagher, 500 Electric Building, 
P. O. Box 2529, Billings, Montana 59101. 




SHEEHY 



? 



(f) Appendix 



EXHIBITS : 




Pltf . 


•s 


6 




Pltf . 


•s 


7 




Pltf. 


•s 


8 




Pltf. 


•s 


9 




Pltf. 


•s 


10 




Pltf. 


•s 


11 




Pltf. 


•s 


12 




Pltf, 


•s 


13 




Pltf. 


»s 


14 




Pltf. 


•s 


15 




Pltf 


•s 


16 




Pltf. 


•s 


18 and 


19 


Pltf. 


•s 


17 




Pltf. 


•s 


20 




Pltf, 


•s 


21 




Pltf. 


•s 


22 




Dfdt. 


•s 


23 




Dfdt. 


»s 


24 




Dfdt. 


•s 


25 




Dfdt. 


•s 


26 




Dfdt. 


•s 


28 and 


29 


Dfdt. 


•s 


30 




Dfdt. 


•s 


31 




Dfdt. 


•s 


32 




Dfdt. 


•s 


35 and 


36 


Dfdt. 


•s 


37 




Dfdt. 


•s 


38 




Dfdt. 


•s 


39 




Dfdt, 


•s 


40 




Dfdt. 


's 


41 




Dfdt. 


's 


42 




Dfdt. 


•s 


43 




Dfdt. 


's 


44 




Dfdt. 


's 


45 and 


46 


Dfdto 


's 


47 




Dfdt . ' 


's 


48 




Dfdt „ ' 


's 


49 - Refused 



INDEX 





Received 


Volume 


Page 


I 


36 


I 


47 


I 


51 


I 


53 


I 


56 


I 


59 


I 


62 


I 


63 


I 


67 


I 


82 


II 


95 


II 


98 


II 


100 


II 


101 


II 


109 


II 


119 


II 


131 


II 


132 


II 


135 


II 


145 


II 


152 


II 


158 


II 


163 


II 


175 


II 


193 


II 


194 


II 


197 


II 


199 


II 


200 


II 


203 


II 


204 


II 


206 


II 


209 


III 


251 


III 


252 


III 


255 


III 


256 



-37- 



No. 22535 & 22535-A 



IHniteb States Court of Hppeals 
for the Bintb Circuit 



ECONO-CAR INTERNATIONAL, INC., 
VS. 

CARL M. TAUTE, d/b/a ECONO-CAR OF BILLINGS, 



Appellant, 



Appellee. 



CARL M. TAUTE, d/b/a ECONO-CAR OF BILLINGS, 



vs. 
ECONO-CAR INTERNATIONAL, INC., 



Appellant, 



Appellee. 



Appeal from the United States District Court 
for the District of Montana, Billings Division 



Answering Brief of Appellee Taute to 
Brief of Appellant Econo-Car InternationaL Inc. 



JOHN C. SHEEHY, ESQ. 
HUTTON, SCHILTZ & SHEEHY 

403 Electric Building 
Billings, Montana 59101 
Attorneys for Appellee Taute 

Due Date: May 5, 1968 



61LL1N5S TIMES PRINT 



Filed r...l..L-..E..D- , 1968 

mT7 ms '^^^'^ 

l/VM. B. LUCK, CLERK 



1 
SUBJECT INDEX 



Page 



(a) Subject Index „ . , , » , o . « . » i 

Citations and Authorities „ .... ..o ... ...o ii 

(b) Statement of Jurisdiction 1 

\C J oxaxeinenx ox xne v^ase ......o............... ....... j- 

(d) Cross-Specifications of Error 5 

(e ) Argument 7 

SUMMARY , „ 7 

ARGUMENT . . , . „ 8 

\i / L/Onc JLusxon ...o..... ...... ...... ....... .•.«.....•. ^o 



11 
CITATIONS AND AUTHORITIES 
Cases : 



Page 



Hillman v. Luzon Cafe Company (Mont. 1914) 
49 Mont. 180, 142 P, 643 ....... o... 20 

Kelly V. Ellis, 39 Mont. 597, 104 P. 873 (1909),.. 9 

Koch V, Rhodes, 57 Mont. 447, 188 P. 933 (1920).,. 9, 19 

Lee Vo Stockmen's National Bank, 63 Mont, 262, 
283; 207 P, 623 (Mont. 1922) , , , . , , , , . . . . , 22 

McNussen v. Graybeal (Mont, 1965) 146 Mont, 173, 
186; 405 P,2d 447, 454, 455....,, o,,..,,,., 12 

Navarro v, Jeffries (Calif,) 187 C .A ,2d 454 - 

4 \^a, X . lipXr , ftO O .aa.ao3..oooooo,.aaaoaooooo.*.aaa ^O 

New Home Sewing Machine Company v. Songer, 
91 Mont, 137, 7 P,2d 238, ,,, ,,..,,,...,.,......, , 13 

Peder v. Smith (N.J. 1927) 139 A, 23 . ,,,,,,,,,,,, , 21 

Peerless Casualty Company v. Mountain States 
Mutual Casualty Company (U ,S .C ,A . 9th, Mont.) 

Stone-Ordean-Wells Co. v. Anderson, 66 Mont, 64, 

^ S. ^ It o 000oooftooo«o«o«90*oooo«o««o«oo**«oooo««««o X^ 

statutes : 

JL V ^OUO , IVo^.M. X!?^!,. a, 0...00, ,,,.,, ,,000. a, ,...,, XU 

XO*~<jXV/, Iv e^ »"l o Xa^fx/ .aaoo.aaa.oao...o....,,o. ,...,, XX 

13-713, R,CoM„ 1947...... ..., .,.,,.., „ 10 

17-401, R.CM, 1947,, o, o .,..,,,,.,.,,,..... ..,,,. . 25 

58-602, RoC.M, 1947 „.,.,..,,,. .,...o ,.,,., , ,, 25 

93-401-13, RoC.M, 1947...,,,,,,....,.,.,.,..,...., 10 

93-401-17, R,C,M. 1947 ,....,,,.,, 9 



(b) Statement of Jurisdiction , 

This is an appeal from the United States District Court 
for the District of Montana, Billings Division. 

We have earlier set forth a statement of jurisdiction of 
both the federal district court and of this appellate court in a 
brief filed by Taute as appellant in this case. We adopt that 
statement of jurisdiction here. Jurisdiction of the federal 
courts is not disputed by the parties. 

We further adopt the statement contained in the brief of 
Appellant Econo-Car International, Inc. as to jurisdiction, ap- 
pearing at pages 1 and 2 of that brief. 

(c) Statement of the Case , 

In this case Econo-Car International, Inc. has appealed 
to the United States Court of Appeals from the whole of the ver- 
dict and judgment entered against it. Carl M, Taute, the plain- 
tiff in the court below, has appealed from the decision as to the 
Second Claim of his Complaint, Consequently in this appeal which 
has been assigned Docket Nos , 22535 and 22535-A, Taute is both an 
appellant and an appellee, as is Econo-Car International, Inc o 
Therefore, for ease of reference we will in this brief call the 
respective parties either "Econo-Car" or "Taute" for easier 
reading. 

With respect to this brief, however, Taute is answering 
as appellee the brief of appellant, Econo-Car. 

This action was instituted in the state district court 
by Taute, upon the filing of his complaint against Econo-Car. 
The complaint was couched in two claims, the first claim alleging 
a contract and breach thereof by Econo-Car; the second claim 
alleged that Taute was induced to enter into a contractual rela- 



tionship with Econo-Car through fraudulent deceit. For each 
claim Taute claimed damages. 

The prayer of the original complaint was amended during 
the course of the trial. The amount of Taute 's prayer at the 
close of all of the evidence in the case upon such amendment was 
a claim of $32,679.86 (Tr. 265), 

This was the total prayed for by Taute with respect to 
both the first and second claim of his complaint. 

Prior to June 28, 1963, Taute was employed in Billings 
in a managerial capacity with Ryan Grocery Company. He had, a 
few weeks earlier than June 28, 1963, responded to an advertise- 
ment in a local paper o That advertisement had been inserted by 
Econo-Car and in fact was soliciting possible franchisees to 
operate a car rental agency in Billings. 

In response to the ad, Taute addressed a letter to the 
box number indicated in the advertisement expressing his interest 
in such a franchise . 

In response to his letter he received some time later a 
telephone call from a Mr, Burko , As a result of that telephone 
call Taute, and his wife Rayetta, had two meetings in the Esquire 
Motel in Billings with Burko and a Mr, Alvarez, whom Burko rep- 
resented as being on the national sales staff of Econo-Car. 

Burko identified himself as Econo-Car *s representative 
and that he was calling Taute in response to his letter. The 
meetings were worked out as a result of the telephone call (Tr.27) 

At the first meeting Burko explained to Taute that 
Billings had been chosen as a town that could support a car ren- 
tal operation of the type that Econo-Car had o (Tr, 29) He used 
a blackboard in the motel room to demonstrate how Taute could 



make a profit on a 15 car operation in Billings, using their 
methods, their tools, resources and instructions (Tr . 29). He 
produced and gave to Taute a proposed car rental franchise agree- 
ment (Tr. 30, 31), the original of which eventually became Exhi- 
bit 6 in this action. 

Taute took the proposed franchise home with him, studied 
it for a couple of days and brought it back along with a yellow 
pad on which he had listed some questions that he wanted to ask 
in connection with the provisions of the proposed franchise (Tr .44) 
He asked those questions at a second meeting, again attended by 
Taute, his wife Rayetta, Mr. Burko and Mr. Alvarez in the same 
Esquire Motel. The date of this meeting was June 28, 1963. 

The proposed franchise agreement was discussed clause by 
clause between them, with Burko answering his questions with res- 
pect to the franchise agreement (Tr«35). At that meeting Taute 
signed the agreement and a copy. Apparently the agreements were 
sent to New Jersey for signature by a vice president of Econo-Car 
and one signed copy was subsequently returned to Taute (Tr.35). 

Exhibit 6 is the signed franchise agreement between the 
parties. 

At the time that Taute and Mr . Burko were examining the 
franchise agreement, before it was signed, Burko made certain 
false representations respecting what Econo-Car would do if Taute 
signed the contract . The substance of these conversations were 
admitted by the Court into evidence. We will be referring to 
the items of misrepresentation subsequently in this brief and 
will not refer to them at length here. It is enough to say that 
the jury, by its verdict, found that representations made by Mr, 
Burko to Taute were false and that Taute was fraudulently induced 



to enter into Exhibit 6 by virtue of those representations. 

Taute did not rescind the contract upon learning of the 
falsity of those representations. Because of certain circum- 
stances that existed at the time he chose to go forward with the 
contract . This he had a lawful right to do as we will demonstrate 
later in this brief. 

But Taute discovered that even with respect to the con- 
tract that he found he had, the defendant breached several impor- 
tant provisions of that written contract . Again these breaches 
will be discussed fully by us in our argument in this brief and 
for the sake of brevity we will not set them forth at length here. 

The jury, by its verdict, found that the defendant Econo- 
Car had fraudulently induced Taute to enter into the contract, and 
awarded him the sum of $6,000.00 on the second claim, which re- 
ferred to the fraudulent inducement; it further found that Econo- 
Car had breached the provisions of its contract and awarded 
damages to Taute on the first claim of $1,052.00. 

Thus the jury, by its decision, found the defendant Econo- 
Car guilty on both claims. Taute, however, has appealed from that 
part of the judgment which awarded him only $1,052.00 on the breach 
of contract claim. 

The questions involved relate (1) to the validity of state- 
ments made by Burko to Taute before the agreement was signed, which 
Taute contends were properly admitted by the court; (2) the actual 
breaches of contract as contended for by Taute ; and (30 the pro- 
priety of the court's instruction on fraud which Econo-Car claims 
is insufficient and which Taute claims properly covered the sub- 
ject so far as it went . 



(d) Cross-Specifications of Error . 

Taute is satisfied with the verdict of the jury and the 
judgment of the court with respect to the fraud claim, that is, 
the second claim of the complaint. The verdict on that item was 
for $6,000.00. 

Nevertheless if Econo-Car is successful in attacking 
that verdict in this appeal, certain matters came up during the 
trial on which direction from the United States Court of Appeals 
is necessary in the event of a re-trial. For that reason only, 
Taute makes the following Cross-Specifications of Error. 

1. The court erred in making the following ruling with 
respect to billboard advertising : 

"THE COURT: (In Chambers) After consideration 
of the facts shown by the plaintiff's offer of 
proof taken in open court with the witness on 
the stand, it is ordered that the plaintiff's 
motion for permission to argue the problem of 
the billboards in his opening statement is denied, 
and the court indicates at that time that if and 
when evidence as to the billboard matter is 
offered that objections to it will be sustained 
♦ * *." 

In connection with this specification of error, the court allowed 
the offer of proof to be made in the form of direct testimony 
from the witness Taute on the stand. The offer of proof consists 
of Transcript pages 5 through 24. For the sake of brevity, we 
do not repeat in this brief at this point that testimony in full 
and ask the Court to be excused from the provisions of Rule 18, 
2, (d) of the Rule of the United States Court of Appeals, Ninth 



Circuit, in this particular. We state that in substance (Tr.lO) 
Econo-Car was to provide billboard and newspaper advertising; 
that as part of the "Institution of an effective and continued 
sales promotion campaign" promised in paragraph 4C(c) of Exhibit 
6 that Econo-Car was to erect seven to ten. billboards for a 90 
day period in the main traffic arteries around the area of Bill- 
ings, and provide three full pages of newspaper advertising (Tr. 

11) o 

2. The court erred in refusing Taute*s offer of proof, 
in words and figures as follows : 

"Comes now the plaintiff by the witness now 
on the stand, Carl Taute, and offers to prove, 
and by this witness will prove, that following 
the date February 15, 1965, when he finally 
closed the business of Econo-Car in Billings 
he thereafter, subsequently, daily and diligently, 
in substance, searched for a position or job and 
was unable to locate or obtain such a job in 
Billings until the 31st day of May, 1965, when 
he went to work at his present position. 

"Plaintiff also offers to prove that at the 
time of his termination of employment with Ryan 
Grocery Company, prior to undertaking the opera- 
tion of Econo-Car in Billings, he was earning 
a yearly salary of $12,200, excluding bonuses 
and other benefits, insurance and so on. 

*That the plaintiff so offers to prove." 
(Tr.242) 
to which the Court sustained the following objection: 



"I object to the offer of proof in that it 
concerns testimony relating to the elements of 
damages which are not properly allowable under 
either claim of the complaint. It is irrelevant 
to any issues in the case." 

"THE COURT: The objections to the offer of 
proof are sustained, and let the record show 
that this offer of proof is, pursuant to 
stipulation, deemed to have been made at the 
time while the witness referred to is on the 
stand . " 

(Tr. 243) 
(e) Argument 
SUMMARY : 

£cono-Car has no cause to complain either as to the size 
of the verdict, or the rulings of the court on admissability of 
evidence • 

The franchise agreement, Exhibit 6, was prepared and 
printed by Econo-Car. It contained a number of provisions as to 
what Econo-Car would provide Taute « These provisions were so 
vague, indefinite and ambiguous that no court could construe, 
interpret or enforce those provisions without resort to extrinsic 
or parol testimony as to what the provisions meant. 

The trial court limited Taute to parol evidence which 
would explain indefinite or vague provisions of Exhibit 6, It 
refused to allow Taute to introduce evidence which the court 
felt would contradict or vary the terms of Exhibit 6, even 
though under the law on a fraud claim Taute should have been 
allowed to do this. 



The court, therefore, by its rulings on the adroissability 
of evidence, limited Taute only to such parol evidence as tended 
to explain provisions of Exhibit 6 that were vague and indefinite 
and that have been written in the first instance by Econo-Car. 

Econo-Car may not complain that Taute did not elect to 
rescind the contract immediately upon learning of the falsity of 
Burko*s representations. Taute had the right, under the law and 
the cases, both in Montana and New Jersey, either to rescind the 
contract at the time of the discovery, or to accept the contract, 
make the best of his bargain, and pursue Econo-Car for damages 
for the fraudulent deceit, Taute, as he had a right to do, chose 
the latter . He did not thereby waive his right to damages for 
the fraud. The court submitted the question of waiver of damages 
for fraud to the jury under proper instructions and the jury 
found against Econo-Car on that question of fact. 

With respect to Taute *s Cross Specifications of Error in 
this part of the appeal, if any re-trial of this cause becomes 
necessary, Taute should be allowed to introduce evidence with 
respect to representations made to him by Mr. Burko as to bill- 
board advertising; and as a part of his damages, he should be 
allowed to recover for his enforced idleness by virtue of the 
acts of Econo-Car from February 15, 1965, until he found a job 
on May 15, 1965, after diligent search. 
ARGUMENT ; 

Upon studying the issues presented by the pleadings, the 
rulings made by the court, and the size of the verdict on the 
first claim, the breach of contract claim, one wonders what 
prompts Econo-Car to appeal at all. 

The court protected Econo-Car with respect to the 



fraudulent representations made by Mr, Burko to the fullest ex- 
tent during the trial. It limited evidence of parol representa- 
tions by Mr. Burko only to those that were within ambiguities 
found in Exhibit 6, the franchise agreement. It did not permit 
any representations made by Burko that would vary or contradict 
the terms of the franchise agreement, although under a fraud 
claim such representations would have been admissable under Mon- 
tana law , 

In other words, the trial court gave Econo-Car the full 
benefit of Kelly v. Ellis , 39 Mont. 597, 104 P., 873 (1909), It 
refused to give Taute the benefit of the decision in Koch v . 
Rhodes, 57 Mont. 447, 188 P. 933 (1920) as to admissability of 
evidence under a fraud claim. The trial court so ruled although 
in Koch , the Montana Court specifically distinguished Kelly v . 
Ellis as not being applicable in a fraud case on the admissabil- 
ity of evidence (See 188 Pacific Reporter, page 936), 

It is elementary that parol evidence of negotiations or 
discussions of parties leading up to a contract are admissable 
to explain its terms, to aid the court in its construction, or 
to explain vague, indefinite or ambiguous provisions of the con- 
tract. This is inherent both in statute law and in decided 
cases in Montana . 

The pertinent Montana statutes are as follows: 

"93-401-17(10521) The circumstances to be 
considered . For the proper construction of an 
instrument, the circumstances under which it 
was made, including the situation of the subject 
of the instrument, and of the parties to it, may 
also be shown, so that the Judge be placed in 



the position of those whose language he is 
to interpret o" 

"13-713 o (7538) Contracts explained by 
circumstances , A contract may be explained 
by reference to the circumstances under which 
it was made and the matter to which it relates." 

"13-308 „ (7480) Actual fraud , acts constituting . 
Actual fraud, within the meaning of this chapter, 
consists in any of the following acts, committed 
by a party to the contract, or with his connivance 
with intent to deceive another party thereto, or to 
induce him to enter into the contract : 

lo The suggestion, as a fact, of that which 
is not true, by one who does not believe it to 
be true ; 

2, The positive assertion, in a manner not 
warranted by the information of the person making 
it, of that which is not true, though he believes 
it to be true; 

3. The suppression of that which is true, by 
one having knowledge or belief of the fact; 

4o A promise made without any intention of 
performing it; or, 

5. Any other act fitted to deceive." 
"93-401-13. (10517) An agreement reduced to 
writing deemed the whole . When the terms of an 
agreement have been reduced to writing by the 
parties, it is to be considered as containing 
all those terms, and therefore there can be 



between the parties and their representatives, 
or successors in interest, no evidence of the 
terms of the agreement other than the contents 
of the writing, except in the following cases: 

lo Where a mistake or imperfection of the 
writing is put in issue by the pleadings. 

2. Where the validity of the agreement is 
the fact in dispute. 

But this section does not exclude other 
evidence of the circumstances under which the 
agreement was made, or to which it relates, 
as defined in section 93-401-17, or to explain 
an extrinsic ambiguity, or to establish ille- 
gality or fraud. The term agreement includes 
deeds and wills, as well as contracts between 
parties," 

"13-310, (7482) Actual fraud a question of 
fact . Actual fraud is always a question of 
fact." 
The foregoing statutes are all sections from the Revised Codes 
of Montana, 1947. 

As we said, the trial court limited the parol evidence 
only to that which would explain ambiguities or unclear provi- 
sions of the franchise agreement . That franchise agreement had 
been prepared and printed by Econo-Car. Under casebook law, 
the provisions thereof were to be construed against Econo-Car. 
The trial court limited the parol evidence so as to explain only 
a few of the provisions of the Econo-Car franchise agreement . 

Parol evidence of conversations which does not vary the 



terms of the written contract is adroissable ( Stone -Ordean-We 1 Is 
Co. V. Anderson , 212 P.. 853, 66 Mont. 64). 

Extrinsic evidence is admissable to show what the par- 
ties meant by what they said, but not to show something other 
than what they said ( Peerless Casualty Co. Vo Mountain States 
Mutual Casualty Co . (U.S.C.A., 9th, Mont.) 203 F.2d 268). 

In McNussen v. Graybeal (Mont. 1965) 146 Mont. 173, 186; 
405 Po2d 447, 454, 455, the Montana Court said: 

"It is well settled law that the question 
of whether an ambiguity exists is one of law 
for the court. But where there is a conflict 
of testimony as to what were the intentions 
of the party toward the use of the ambiguous 
word, determination of the true meaning is one 
of fact for the jury. In National Cash Regis- 
ter Co. Vo Wall, 58 Mont. 60, 62, 190 P. 135, 
the court in construing the word 'special^ to 
be ambiguous said: •* * * indeed without a 
description * * * aliunde the contract itself, 
it is difficult to conceive how a jury could 
understand the meaning of the word 'special* 
unaided by any account of the circumstances and 
the conversation leading up to the making of 
the contract and the meeting of the minds of the 
parties upon the particulars necessary to its 
consummation^^ * * In no other way could the 
issues the jury were called upon to settle be 
made intelligible to them* . Further, sections 
13-702 and 13-713, R.C.M. 1947 explicitly allow 



extrinsic evidence to explain the true inten- 
tions of the parties where a word is found to 
be ambiguous." 

In New Home Sewing Machine Company v. Songer , 7 Po2d 238, 
91 Mont« 137, the Court said: 

"If the language of the agreement is clear, 
it needs no interpretation; the intention of the 
parties is to be ascertained from the writing 
alone (citing cases) o Resort may be had to parol 
evidence in aid of interpretation only when the 
contract appears on its face to be ambiguous or 
uncertain o (citing a case and statutes) 

"While it is true that the term * finance plan* 
is in general use, we are not prepared to say 
that it has any well-defined or fixed meaning. 
It is a matter of common knowledge that the 
finance plan employed in the business world and 
the distribution and disposal of merchandise are 
varied, and that the use of the term by one con- 
cern would mean one thing, and when used by an- 
other would denote something entirely different. 

"The meaning of the term used is not so free 
from doubt that it can be said as a matter of law 
that it furnishes its own interpretation. That the 
writing does not contain all of the conditions of 
the agreement is apparent; resort must be had to 
extrinsic facts for an explanation of plaintiff's 
finance plan. The agreement is uncertain and 
ambiguous and the court ruled correctly in 



admitting the evidence." 

Having in mind, therefore, the foregoing statutes and 
decisions of the Montana Court, let us look at some of the provi- 
sions of the franchise agreement in this case, Exhibit 6„ 

In paragraph 4,C,a, the franchise agreement states: 

"ECONO-CAR AGREES: 
* * * 

Co To furnish guidance to the ECONO-DEALER 
in establishing, operating and promoting the 
business of renting automobiles with respect to: 

a.) the selection of premises for the estab- 
lishing of places of business." 
In that provision of the franchise agreement, what does the word 
"guidance" mean? How could any court interpret or define the 
obligations of Econo-Car to Taute under that provision without 
resort to extrinsic evidence? Is not parol evidence absolutely 
necessary if any effect is to be given to the quoted provision 
a£ the contract? 

As a matter of fact, Burko did make statements as to 
what Econo-Car would do in aiding Taute to select a location for 
his rental business in Billings o The subject was discussed by 
Taute and Mr. Burko and Mr. Alvarez before he signed the contract 
(Tro 36). In response to Taute 's quite natural question as to 
what the clause meant, Burko responded that Econo-Car had made 
a survey of Billings under his supervision and had located the 
three top locations in Billings and that in connection with the 
establishment of his premises they would send a three man crew 
in who knew the top places, although Taute would make the final 
decision as to which of the three he wanted (Tr . 37, 38). Taute 
further testified: 



'"Q, When be made that statement to you 

did you rely on what he was saying? 

Ao Certainly." 

(Tr. 39) 

We respectfully submit that the provision with respect 
to the selection of the place of business was ambiguous in Ex- 
hibit 6, that the ambiguity resulted from the language used by 
Econo-Car and that parol evidence was admissable to explain 
what that provision meant. Otherwise the jury could not intel- 
ligently decide whether the contract had been performed by 
Econo-Car . 

Moreover, this evidence did not vary or contradict or 
add to the terms of the franchise agreement . It merely explained 
that agreement. There is no merit therefore to Econo-Car 's Spe-' 
cification of Error No. 1 as to this evidence. 

Similarly, other evidence was necessary to explain other 

provisions of the contract. Again let us look at the franchise 

agreement, Exhibit 6, for another example of ambiguity. It is 

provided in paragraph 4,C,c.) as follows: 

"4. ECONO-CAR AGREES: 
♦ ♦ ♦ 

C. * * * 

c.) The institution of an effective and 

continued sales promotion campaign, making avail- 
able to the ECONO-DEALER sales and promotional 
aids above and beyond the basic ECONO-DEALER 'S 
kit, as and when such aids are developed by 
Econo-Car 's staff." 
Could any court or any jury, looking at that provision, construe, 
interpret or enforce the obligations of Econo-Car without resort 
to extrinsic evidence as to what the provision meant? Do the 



words "the institution of an effective and continued sales promo- 
tion campaign" explain themselves? Certainly not. Something 
must be added in order to determine what the parties mean by the 
provision., And here again the Court permitted extrinsic parol 
evidence, and properly soo With respect to that provision, and 
as to what it meant, Taute testified that in his conversation 
with Mr, Burko, Mr, Burko told him that in return for the $6,000 
that he was paying for the franchise and as to what it would buy, 
there would be in addition to the three man crew, three full page 
newspaper ads in the Billings Gazette to publicize the opening; 
that the three man crew would work and call on every business 
which their experience indicated would be a prospect for car 
rental business (Tr o 40). Further, that in the way of start-up 
expenses (Tr o 41), Taute testified that Burko said that Econo-Car 
would spend every cent of that $6,000 franchise fee in getting 
Taute's operation going(Tro 42). 

Certainly this evidence is only explanatory of what 
Econo-Car meant with respect to the language "the institution of 
an effective and continued sales promotion campaign". The Court 
properly admitted this evidence. 

For some reason that we do not fathom, the Court ex- 
cluded the conversation with respect to both billboard advertis- 
ing, although it was part and parcel of the same conversation 
relating to the newspaper ads and the spending of the $6,000 
franchise fee. For some reason the Court distinguished between 
billboard advertising and newspaper advertising in sales promotion 
campaigns. We have contended of course in our Cross Specification 
of Error No, 1 that the evidence relating to billboard advertising 
was also admissable and counsel for Taute should have been allowed 



to make reference to it during the opening statement . The verdict 
of the jury, however, cured the objection. 

However, the newspaper advertising was further expanded 
in Schedule A attached to the franchise agreement. Exhibit 6, for 
in paragraph 5 there was a provision for announcement advertising 
ads at the expense of Econo-Car in the local newspaper. 

Finally, Econo-Car objects to the admission of evidence 
respecting the option of deciding the term of the lease of the 
automobiles „ That evidence came about as follows: 

In Schedule B, which is attached to Exhibit 6, one finds 
the "Econo-Car Lease Plan" relating to automobiles to be supplied 
to Taute by Econo-Car. In Schedule B, in paragraph 2, is found 
the following language: "Each lease shall run for a minimum 
period of 12 months to a maximum of 18 months"* * *"The ECONO- 
DEALER shall execute a standard form of ECONO-CAR LEASE AGREEMENT 
before delivery of any vehicles.," 

There is a glaring ambiguity in the quoted provisions 
of Schedule Bo The agreement does not state at whose option, 
Econo-Car or Taute, or both, will the lease on individual auto- 
mobiles be terminated between the twelfth month and the eighteenth 
month o Taute contended that during his conversations with Mr» 
Burko he was informed that it would be at his option (Tr, 44) „ 
Further Mr. Burko gave reasons why Taute would have the option 
as to the length of term between the twelfth and the eighteenth 
month (Tr, 44-45). Here again the evidence was certainly admiss- 
able to explain what could not be determined from the contract 
Itself — which party had the right of deciding when the automo- 
biles would be turned in between the twelfth and the eighteenth 
month. Parol evidence on that point was admissable. It did not 



vary the written contract between the parties a 

We may note parenthetically, however, that Econo-Car 
assumed the option right to itself when it presented Exhibit 7 to 
Taute for signature. In that instrument, the Lease Agreement, it 
was provided that Econo-Car would have the option of deciding be- 
tween the twelfth and the eighteenth month, except that if it did 
it would have to provide Taute with a replacement model of the 
same current year and model o 

We believe that we have demonstrated by the foregoing 
that there is no substance to Specification of Error No. 1 posed 
by Econo-Car, 

Since the mentioned items of evidence not only explained 
the ambiguous portion of the contract, but also provided the basis 
for Taute *s fraud claim, the evidence was sufficient to demonstrate 
to the jury that Mr. Burko made false representations to Taute 
with the intention of inducing him to enter into the franchise 
agreement, and that at the time he made the representations he 
knew they were false or that they would not be performed, and that 
Taute relied upon them. Accordingly it was not error to deny the 
various motions of Econo-Car for non-suit or directed verdict as 
the case may be, or to refuse to strike the testimony relating to 
Mr, Burko *s conversations. This disposes therefore of Econo-Car *s 
Specifications of Error No. 2, 3, 4, and 5, 

The fraudulent promises made by Mr „ Burko, therefore, 
came into the evidence under the rule that ambiguous or vague 
provisions of contracts may be explained by extrinsic oral evidence 
Those same items of evidence, however, because they were fraudulent 
constituted a basis of Taute's first claim for fraud, Econo-Car 
contends that Taute. upon discovering the falsitv of those reore- 



sentations, should have immediately rescinded the contract, and 
that because Taute did not do so he waived his right to damages 
for the fraud. This, however, is a misconception of the law. 
This Court, under Erie applies the law of the forum 
to cases in the federal jurisdiction. We apprehend that this 
Court would apply Montana law, as to a tort claim such as one 
for fraudulent deceit, even though the franchise agreement in 
this case recited that with respect to the enforcement of the 
contract, New Jersey law applied. Irrespective of whether Montana 
law or New Jersey law was applicable, however, the result would be 
the same in this case with respect to the fraud claim. 

In Koch V. Rhodes (Mont. 1920) 57 Mont. 447, 188 P. 933, 
937, the Montana Court said: 

"Under our statutes and under the authori- 
ties, one who has been fraudulently induced to 
enter into a contract has the choice of either 
rescinding the contract by restoring or offering 
to restore what he has received under the con- 
tract, and recover what he has parted with, or 
he may affirm the contract, keeping whatever 
property he may have received or advantage 
gained, or sue in an action for deceit for the 
damages suffered by reason of the fraud. While 
the affirmance of the contract precludes him 
thereafter from rescinding, he may still sue 
for damages, unless he waives that right. Como 
Orchard Co. v„ Markham, 54 Mont. 438, 171 P. 274, 

* * ♦ 

"And while by an affirmance of the contract 



one may waive, not only his right to rescind, 
but also his right of action for the deceit, 
it is only when such intention is clearly 
manifested that such a waiver will be de- 
clared. There is a clear distinction between 
the waiver of the right to rescind and the 
waiver of the right of action . This is pointed 
by Mr » Colley in his work on torts, paragraph 257, 
as follows : 

*The fraud may also be waived by an express 
affirmance of the contract . Where an affirmance 
is relied upon it should appear that the party 
having the right to complain of the fraud had 
freely and with full knowledge of his right in 
some form clearly manifested his intention to 
abide by the contract and waive any remedy he 
might have had for the deception* »" (Emphasis 
supplied) 

Thus a waiver of the right to rescind is not the 
same as the waiver of a right to pursue damages for the deceit. 
In an earlier Montana case, Hillman v. Luzon Cafe Company (Mont. 
1914) 49 Mont. 180, 142 P. 643, where it was contended that al- 
leged representations whether pleaded or not were not admissable 
because the written contract superseded all prior negotiations 
between the parties and presumably contained the full text of 
the agreement, the court held that such representations were ad- 
missable saying that the plaintiffs had mistaken the full force 
of the defendant's position which is that the contract was pro- 
cured by false representations. The Montana Court further dis- 



tlnguished in the Hillman case the fact that the representations 
did not tend to vary or contradict the terms of the written con- 
tract. We have that situation here. The false representations 
did not change the ambiguous terms of the franchise agreement in 
this case; they simply explained what Taute thought he was getting 
under those ambiguous terms. 

This Appellate Court is not called upon to decide in 
this case whether fraudulent representations made by a party for 
the purpose of inducing another to enter into a contract are ad- 
missable, even though they vary the terms of the written contract. 
That is not the case here. The fraudulent representations do not 
vary in one iota the franchise agreement. The ambiguous terms are 
Econo-Car's own creation. It cannot complain if its agents, Mr. 
Burko and Mr. Alvarez, used those ambiguous terms to mislead 
Taute. All of those cases therefore cited by Econo-Car in its 
appellant brief to the effect that fraudulent representations 
which vary the terms of written contracts are not admissable, are 
of no force here. This Court is not faced with that situation. 

New Jersey agrees that a party who is induced by deceit 
to enter into a contract may affirm the contract and pursue his 
action for damages on the deceit. In Peder v. Smith (N, J, 1927) 
139 A. 23, it is stated: 

"Where a party has paid money on a contract 
entered into through misrepresentation, he may 
bring an action for deceit against the party 
guilty of fraud; he may waive the fraud and sue 
upon a breach of the original contract ; or res- 
cind and recover what he has paid on it." 



We turn now to Econo-^^ar*s Specification of Error No. 6 
with respect to the instruction of the Court on fraud. Taute 
contends that this instruction fully comprehended the law on fraud 
and told the jury what it must find in order to find a verdict in 
favor of Taute o The Court having properly instructed the jury, 
it is presumed that the jury did its duty under that instruction. 

In Lee v. Stockmen's National Bank , 63 Mont. 262, 283; 
207 P. 623 (Mont. 1922), the Court stated: 

"In order to go to the jury the plaintiff 
must make out a prima facie case embracing 
the elements of actual fraud, viz.: (1) a 
representation; (2) its falsity; (3) its 
materiality; (4) the speaker's knowledge of 
its falsity or ignorance of its truth; (5) 
his intent that it should be acted upon by 
the person and in the manner reasonably 
contemplated; (6) the hearer's ignorance of 
its falsity; (7) his reliance upon its truth; 
and (8) his right to rely thereon; (9) his 
consequent and proximate injury (26 C.J. 1062)." 
The trial court in its instruction to this jury included all of 
these elements within its instruction and properly told the jury 
what it must find in order to hold Econo-Car guilty of fraudulent 
deceit. Therefore, there is no merit to Econo-Car 's Specification 
of Error No . 6 . 

With respect to Econo-Car 's Specification of Error No, 7, 
since the offered instructions are not set out in totidem verbis, 
pursuant to Rule 18 of this Court, we assume that Econo-Car is 

not spriniis nh-^^nt this Snpr.i f i o.a t i on _ 



Specification of Error No. 8 of Econo-Car relates to 
the Court's instruction on insurance. 

The evidence is uncontraverted that Econo-Car changed 
the provisions relating to insurance without the consent of Taute . 
We have fully expanded on this subject in Taute *s brief as appel- 
lant before this Court. 

Econo-Car *s objection here is that Taute was not damaged 
by the changes in insurance, Econo-Car does not explain how he 
was not damaged, since it is positive in the evidence that Econo- 
Car collected $5^00 per month per car or an additional $50 per 
month for an insurance cost which it agreed under its franchise 
agreement to bear itself. In paragraph E of Exhibit 6, such in- 
surance was to be provided by Econo-Car "at no additional expense" 
to Taute. Econo-Car under the evidence in this case did charge 
additional expense to Taute for the insurance that Econo-Car pro- 
vided , 

Econo-Car is contending under this Specification of 
Error that Taute was playing no more than he bargained for and 
therefore he was not damaged o This is not a true statement of 
the evidence. Under Exhibit 7, the lease agreement, in paragraph 
2 of that exhibit, with respect to the charges to Taute for the 
rental of the automobiles during the lease term, it was provided 
that any increase or decrease in the rates charged to Econo-Car 
by the holder (Chrysler Leasing) should be passed on to Taute „ 
When Chrysler Leasing reduced its rates to Econo-Car, Econo-Car 
in turn passed that reduction on to Taute., But then it added an 
increase for the cost of insurance. It was not thereby giving 
Taute what he bargained for in the cost of rental of the automo- 
biles. His bargain was for a rate per month that would increase 



or decrease depending upon the rates charged to Econo-Car by 
Chrysler Leasing. In effect Econ-Car was not passing on to Taute 
the decrease in the rental rate charged by Chrysler, because 
Econo-Car was additionally charging Taute the cost of insurance 
after it had received a rate decrease from Chrysler. It is unfair 
to contend that in this situation Taute was receiving "what he 
bargained for" with respect to the rates to be charged him for 
the rental of automobiles „ Taute was entitled to any reduction 
that Chrysler Leasing granted with respect to those automobiles 
to Econo-Car. Econo-Car was not entitled, since it was to supply 
insurance at its expense, to pass on such insurance costs to Taute, 
irrespective of the increases or decreases that Chrysler Leasing 
may have granted. There is absolutely no merit, therefore, in 
Econo-Car *s Specification of Error No. 8„ 

With respect to Econo-Car 's Specification of Error No. 9, 
again we find no cause for complaint as far as Econo-Car is con- 
cerned. The record is replete with breaches of the lease term 
arrangement with Taute, as to turn-in provisions, as to the length 
of term, as to effective and continued advertising, and as to in- 
surance costs o Taute has fully expanded on these in his Appellant* 
Brief in this case. The law stated by the Court in its instruction 
to the effect that if these breaches were not assented to by Taute, 
he could recover damages therefor, is a correct statement of the 
law. The Court in this case went awry on the damages that could 
be recovered, since the trial court refused to regard the actions 
of the defendant Econo-Car as a repudiation of the whole contract 
and thus limited the damages that Taute could receive. The jury 
in this case allowed Taute all of the damages for breach of con- 
tract, that it r-.rmld allow iind^ir +.h*> i ns+-riir«-H <-»«<= #-»-F -t-Vk^ r-^n-r.-*- 



limited as the jury was to consideration of insurance costs, and 
costs for individual items of damages on the various breaches. 
Except for the amount of damages which the Court allowed on the 
breach of contract claimed, it correctly stated the law for the 
jury, and there is no merit in Econo-Car*s objection to that law. 

We will close our argument by speaking briefly of the 
damages that were recovered and the damages that ought properly 
be allowable to Taute in this case. His verdict, in total, of 
$7,052.00 is inadequate to cover the damages which he sustained 
in this case. The verdict does not amount even to one-half of 
his out-of-pocket expenses, considering the franchise fee, the 
monies which he invested in the venture, and the operating loss 
which he sustained during the time that he was an Econo-Car dealer 
He was entitled, under each claim, to be fully compensated for his 
loss. 

The measure of damages for fraudulent deceit is set 
forth in Sec» 58-602 , RCM 1947 , which provides : 

"58-602, (7574) Fraudulent deceit . One 

who willfully deceives another, with intent 

I to induce him to alter his position to his 
injury or risk, is liable for any damage which 
he thereby suffers." 
And again the Revised Codes state : 

"17-401. (8686) Breach of obligation other 
than contract. For the breach of an obligation 
not arising from contract, the measure of damages, 
except where otherwise expressly provided by this 
code, is the amount which will compensate for all 

+ hA Hff»+T»i m«3n+ nTr»vi ma f-**! v r>9ii<soH +ho'»»c»K« mViA-t-KA-** 



it could have been anticipated or not." 

Under those statutes, certainly Taute was entitled to 
all of his out-of-pocket expenses on the fraud claim. The jury 
awraded him the amount of his franchise fee, the sum of $6, 000, 00, 
Certainly his franchise wasn't worth anything to him, when it is 
considered what additional time, effort, money and investment he 
had to expend and employ under his arrangement with Econo-Car , 
The amount of the damages on the fraud claim is acceptable to Mr. 
Taute „ However, he cannot agree that the damages which he re- 
ceived for the breach of contract are adequate , No consideration 
was given under the Court's instruction on the breach of contract 
to his actual out-of-pocket expenses or the fact that the accumu- 
lated effect of Econo-Car *s actions was to prevent him from per- 
forming the contract that he thought he had for a car rental 
agency , 

There are parts of the Court's instruction with respect 
to the breach of contract that were incorrect; we have set them 
out in Taute's appellant brief in this case. These inaccuracies, 
however, were not to the disadvantage of Econo-Car; rather they 
were to its advantage. 

Finally we wish to say a word in support of the Cross 
Specification of Error in this brief of Taute, relating to his 
offer of proof for the time that he expended. He should have 
been recompensed for his enforced idleness. It was so held in 
Navarro v. Jeffries (Calif.) 187 C .A . 2nd 454 — 5 Cal. Rptr. 435, 
(f) Conclusion 

We conclude this brief by submitting to the Court that 
the judgment with respect to the fraud claim should be affirmed 
and that the iudement with respect to the breach of contract o.laim 



should be returned to the District Court for further proceedings 
relating only to the issue of damages. There is no need, in the 
light of the uncontra verted evidence in this case, to go through 
the breach of contract provisions with another jury. 

Respectfully submitted, 




JOHN C/SMEEHY 

Of Couh^l for Appellee, TaiUe 




BUTTON, SCHILTZ & SHEEHY 
403 Electric Building 
Billings, Montana 59101 
Attorneys for Appellee, Taute 



I 



CERTIFICATE 

John C. Sheehy, an attorney duly authorized to 
practice in the United States Court of Appeals for the Ninth 
Circuit, states as follows: 

I certify that, in connection with the preparation 
of this brief, I have examined Rules 18 and 19 of the United 
States Court of Appeals for the Ninth Circuit, and that in my 
opinion, the foregoing Brief is in full compliance with those 
rules , 





J09N C. SMEEMY; Attori^y for 
llee, Taute 



CERTIFICATE OF MAILING 

I hereby certify that on the day of May, 1968, 

I deposited in the Post Office at Billings, Montana, in an 
envelope securely sealed, with postage thereon prepaid, three 
copies of the within and foregoing Brief of Appellee, Taute, 
addressed to George C. Dalthorp, Esq., Crowley, Kilbourne, 
Haughey, Hanson & Gallagher, 500 Electric Building, P» O. Box 
2529, Billings, Montana 59101. 




/JOHN C . SHEEirt' 




I 



No. 22535 & 22535-A 



UNITED STATES COIJRT OF APPEALS 
FOR THE NINTH CIRCUIT 



ECCNO-CAR INTERNATIONAL, INC., 



vs. 



CARL M. TAUTE, d/b/a ECONO-CAR OF BILLINGS, 



vs. 



:CCNO-CAR INTERNATIONAL, INC., 



Appellant, 



Appellee, 



CARL K. TAUTE, d/b/a ECONO-CAR OF BILLINGS, 



Appellant, 



Apoellee. 



Appeal from the United States District CoLirt 
for the District of Montana, Billings Division 



BRIEF OF DEFENDANT ECONO-CAR INTERNATIONAL, INC. 
ANSI'JERING BRIEF OF PLAINTIFF CARL M. TAUTE 



CROInTLEY, KILBOURNE, HAUGHEY, HAiTSON & GALLAGHER 
500 Electric Building 
P. 0. Box 2529 
Billings, Montana 59101 



FILE 



Filad 



MAY 2 1968 



MM. B, LUa 



i" ' W ff! ' ^ 



1968 
Clerl; 



SUBJECT INDEX 

SUBJECT INDEX i 

TABLE OF CASES ii 

STATUTES ii 

OTHER AUTHORITIES ii 

ARGUMENT 1 

A. PLAINTIFF'S DAMAGES LIMITED. BY WHAT HE 

WOULD HAVE RECEIVED ABSENT ANY BREACH I 

B. SPECIFIC BREACHES ALLEGED BY PLAINTIFF .... 6 

1. TERM OF LEASE ON AUTOMOBILES 6 

2. INSURANCE TERM PROVISIONS 9 

3. TURN- IN CHARGES .11 

4. PLAINTIFF'S CLAIM OF BREACH OF 

ADVERTISING PROVISIONS 12 

"• » 

SUMMARY AND CONCLUSION 14 



TABLE OF CASES 

Page 

Harrington v. Moore Land Co., 59 Mont, 421, 

196 Pac. 975 (1921) 4 

Mitchell V. Carlson, 132 Mont. 1, 313 P. 2d 

717 (1957) 5 

Myers v. Bender, 46 Mont. 497, 129 Pac. 330 

(1913) 3 

Tanenbaum v. Francisco, N.J. 1933, 166 Atl. 105 ... 2 



STATUTES 

Revised Codes of Montana 1947, 

Section 17-301 3 

Revised Codes of Montana 1947, 

Section 17-302 . • 3 



OTHER AUTHORITIES 

Restatement of Contracts, Section 329, 

Comment a , 2 

25 C.J.S. 867, Damages, Section 78 . . . . ; *. ... 2 



ARGUMENT 

A, Plaintiff's Damages Limited by What he Would have Received 
Absent Any Breacn 

The Court's instructions are based upon the rule that 
the measure of damages for breach of contract is the amount 
which will compensate the party aggrieved for all detriment 
proximately caused by the breach not exceeding what the ag- 
grieved party would have received had the contract been 
performed by the defendant. 

Plaintiff not being satisfied with this standard, 
is seeking damages in the nature of restitution to his original 
position. Plaintiff is seeking not only any damages flowing 
from the alleged breaches, but is also seeking to recover his 
capital contributions, his alleged operating losses and com- 
pensation for the time expended by him and his wife in the . 
operation of the business. Thus, plaintiff does not seek 
damages for breach of contract, but wants total and complete 
restitution at defendant's expense irrespective of whether 
plaintiff's operations would have been more successful if none 
of the alleged breaches of contract had occurred. We know of 
no authorities--New Jersey, Montana, or otherwise, setting 
forth such a measure of damages. 

No New Jersey law was cited by plaintiff *s counsel to 

) 
the trial court. Nonetheless, plaintiff is correct in stating 

that the contract provides that the contract is to be construed 

in accordance with New Jersey law. Whether New Jersey law or 

Montana law applies appears immaterial in view of the fact 



that both states generally follow the basic rule for measuring 

compensatory damages for breach of contract as stated in 

Comment a., Restatement of Contracts, § 329 as follows: 

"In awarding compensatory damages, the 
effort is made to put the injured party in 
as good a position as that in which he would 
have been put by full performance of the 
contract, at the cost to the defendant and 
without charging him with harms that he had 
no sufficient reason to foresee when he made 
the contract. ..." 

Even though the New Jersey authorities cited in 

plaintiff's brief are not in point on the facts (because those 

cases and authorities involve situations where a party to a 

contract, and in particular a contractor, was prevented from 

fulfilling his terms of the contract by the other party's 

breach thereof) these cases nevertheless apply the same measure 

of damages. For example, quoting from plaintiff's brief, the 

Court in Tanenbaum v. Francisco, N.J. 1933, 166 Atl. 105 , - 

stated in part: 

"It is well settled that, whenever one 
party to a contract prevents the other from 
carrying out the terms thereof, the other 
party may treat the contract as broken and 
abandon it, and is entitled to such profits 
as he would have"~"received had there oeen a 
complete pertormanceT " (Emphasis ours). 

See also another quotation from plaintiff's brief: 

"Where, without fault on his part, one 
party to a contract who is willing to perform 
it is, by the other party prevented from doing 
so, he is entitled to be placed in as good a 
position as he would have been had the contract 
been performed . ', I When a plaintiff sues on 
a contract to recover the amount he would have 
received for the full performance prevented by 
defendant's breach, he seeks in effect to recover 
as damages the profit from performance of the 
contract, which profit defendant's breach pre- 
vented him from earning." 25 C.J.S . 867, Dam- 



In this case the maximum that plaintiff could be 
entitled to receive under the breach of contract portion of the 
action would be his actual loss sustained by reason of any 
breaches of the contract. This is not, however, what plaintiff 
is seeking. The plaintiff instead, is attempting to convince 
the courts that he would be entitled to be placed in as good a 
position or better than if he had never entered into the con- 
tract in the first instance. 

Under Montana law plaintiff's damages for alleged 
breach of contract would be clearly limited to that which he 
would have received had the contract been fully performed by 
the defendant. 

Pertinent Montana statutes include the following: 

"17-301. Measure of damages for breach of 
contract . For the breach ot an obligation aris- 
ing from contract, the measure of damages, except 
where otherwise expressly provided by this code, '•• 
is the amount which will compensate the party 
aggrieved for all the detriment proximately 
caused thereby, or which, in the ordirjary 
course of things, would be likely to result 
therefrom." (R.C.M. 1947, § 17-301 .) 

"17-302. Damages must be certain . No dam- 
ages can be recovered for a breach of contract 
which are not clearly ascertainable in both 
their nature and origin." (R.C.M. 1947, § 17-302 .) 

In Myers v. Bender, 46 Mont. 497, 129 Pac. 330 (1913 ) 
plaintiff brought an action to recover for services as an 
attorney rendered to the defendant, a part of which compensa- 
tion was based upon a contingent fee arrangement involving the 
value of land and money recovered in an action. One of the 
issues involved in the appeal was whether or not the district 
court applied the proper measure of damages for the breach by 



defendant of his obligation to pay to plaintiff the amount con- 
tracted for. The Court stated in part: 

"If the defendant had made full payment upon 
the completion of plaintiff's services, he 
would have fully performed his contract. 
Since he did not make such payment, he is to 
be held to compensate plaintiff for the detri- 
ment 'proximately caused' by the delay. 'In 
the ordinary course of things ' the only detri- 
ment which could result to him was the loss by 
plaintiff of the use of the money. Therefore 
full compensation for the detriment thus caused 
is to be neasured by the principal amount due, 
together with interest at the legal rate up 
to the date of trial, allowing, of course, 
credit for such payments as have been made, 
at their respective dates. 

* * * 

"The statute (referring to R.C.M. 1947, § 17- 
3U1) embodies the common-law rule, and the 
authorities generally a^ree that the damages 
recoverable in such cases must be limited to 
such as may fairly be supposed to have been 
within the contemplation of the parties when 
they entered into the contract, and such as 
might naturally be expected to result from its 
violation. In no case is the plaintiff entitled 



to recover anything more than he would have 
received had the contract been performed by the 
defendant on his part, assuming that it had been 
performed . " (Emphasis ours). 129 Pac. at p. 333 . 

In Harrington v. Moore Land Co., 59 Mont. 421, 196 

Pac. 975 (1921 ) plaintiff buyers of land sued the seller to 

recover damages for alleged negligence in sowing crops on a 

certain portion of the land. The court in discussing the 

measure of damages stated in part: 

"After an examination of the complaint 
and all of the evidence in this case, we are 
of opinion that the rule of damages applicable 
is that plaintiffs are entitled to recover such 
reasonable amount as will compensate them for 
defendant's failure to do the work agreed, and 
such additional amount as in the ordinary course 
of things would likely result from the breach of 



contract. The damages recoverable, however, 
must be clearly ascertainable in both nature 
and origin. i 

* * * 

"In no event would the plaintiffs be 
entitled to recover anything more than they 
should have received had the contract been 
performed by the defendant on its part, as- 
suming it had been performed," 196 Pac . 
at p, 976 . 

In Mitchell v. Carlson, 132 Mont. 1, 313 P. 2d 717 

(1957 ) a purchaser of a residence sued the builder for damages 

for defects in construction. The court discussed the measure 

of damages, the instructions given and R.C.M. 1947, § 17-301, 

and then stated: 

"Applying the statutory rule of damages 
to this case it is apparent that plaintiffs 
will be compensated only for the detriment 
proximately caused' by the breach, viz., the 
cost of making the repairs necessary to com- 
plete the house in accordance with the parties* 
agreement. The phrase 'proximately caused' 
restrains the jury from awarding damages be- 
yond the amounts proven in the evidence at the 
trial resulting from defendant's breach of con- 
tract." 313 P. 2d at 720 . 

Plaintiff in a slightly different approach to the 

amount of damages, attempts on page 33 of his brief to have 

the statements made by Burko prior to the execution of the 

franchise agreement which were strictly and solely in the 

nature of projected income figures to be taken as a measure of 

damages here. This testimony was, of course, not admissible 

for any purpose and certainly not for the purpose of showing 

the amount of damages sustained by plaintiff by reason of any 

breaches of contract of the defendant. In addition, plaintiff 

also is attempting to take the figures from Plaintiff's 



Exhibit 22 as something of a guarantee of profit in his busi- 
ness and states that he should be entitled to comparable pro- 
fits. Exhibit 22 is, of course, merely a general guide for 
Econo dealers so that they could better analyze their own 
operation to see if they were comparing favorably to other 
Econo dealers. This also, would have no relationship to the 
measure of damages for any breaches of contract which the 
defendant was guilty of. ^' 

B, Specific Breaches Alleged by Plaintiff 
1, Term of Lease on Automobiles . 

One of plaintiff's principal complaints revolves 
around the length of lease term of the automobiles. An outline 
of the background may help, .^^, 

One of the obligations of the <^efendant under the 
franchise agreement was to make available to the plaintiff a 
quantity of automobiles for use in the rent-a-car business. 
Obviously, the terms and conditions under whicH Econo-Car 
itself might be able to obtain the necessary automobiles could 
well change from year to year. As these circumstances changed, 
it would be only natural that the terms and conditions under 
which Econo-Car would supply automobiles to its dealers would 
be expected to change to fit the circumstances. The franchise 
agreement itself clearly contemplates and authorizes such 
changes. For example, the agreement provides that the vehicles 
"may be made available to the Econo dealer on the basis of 
sale, lease, or whatever other method or methods that Econo- 
Car shall negotiate in behalf of all of its Econo dealers." 



(Para. 4.D, Pltf's. Exh. 6). The agreement also provides that 
Econo dealer (plaintiff here) agrees that all vehicles "must be 
acquired by the Econo-dealer on the basis described in Schedule 
"B", or upon such other basis as may be presented by Econo-Car 
for the benefit of the entire Econo-Car rental system ." (Para. 
5.C of Pltf's. Exh. 6). 

Turning to the facts here. Schedule "B" of Plaintiff's 
Exhibit 6 provides that each lease thereunder should run for a 
minimum period of twelve months to a maximum of 18 months. 
Even though plaintiff testified at trial that it had been ex- 
plained to him that he would have the option of extending the 
lease, he nevertheless signed plaintiff's Exhibit 7 providing 
for a lease period of 18 months but giving Econo-Car the option 
to shorten it to 12 months. This instrument was signed during 
the summer of 1963 prior to his starting any operations what- 
ever. 

Causing considerable confusion in the. trial of this 
case was the fact that plaintiff elected not to commence opera- 
tions with 1963 model vehicles, but rather elected to wait 
until the 1964 models came out. At the time that the original 
franchise agreement was signed as well as the time that the 
lease agreement, plaintiff's Exhibit 7, was signed, 1963 model 
automobiles were in use by the Econo-Car dealers. Schedule 
"B" of the agreement refers to these 1963 automobiles, and the 
19648 had not yet been made. 

Quite obviously, Econo-Car International, Inc. negoti- 
ated arrangements with its vehicle supplier, Chrysler Leasing 
Comoration. on a sliehtlv different basis fn-r ^K« i qaa 



automobiles than it had for the 1963 automobiles. As a result 
of these changed circumstances, Econo-Car notified all dealers 
under cover of letter dated November 27, 1963, that there would 
be a substantial rate reduction in the amounts that the local 
dealers had to pay per month for each automobile in their fleets, 
and also that the 1964 automobiles would be available on a 12 
month leasing term instead of the previous 18 month, with the 
option in either party to extend the term for up to two months. 
(See plaintiff's Exhibit 9). This was the arrangement under 
which the 1964 models were put out to the Econo dealers. This 
was the arrangement under which the parties were operating when 
the exchange of correspondence occurred (Plaintiff's Exhibit 
11) wherein plaintiff requested special permission from Econo- 
Car International, Inc. to hold the vehicles in his fleet past 
January 1, 1965, instead of surrendering them during the 13th 
or 14th month of service. It seems worthy of note that the 
plaintiff not only did not complain of the defendant's arrange- 
ments as to the lease term at the time of the promulgation of 
the terms for 1964 but he is also not shown to have complained 
of the reduction in rates that he had to pay for the cars. It 
is obvious that the parties were operating in 1964 on the basis 
of the terms of Plaintiff's E^thibit 9 and not under plaintiff's 
Exhibit 7. 

Under letter dated October 5, 1964, Econo-Car Inter- 

t national. Inc. announced to its Econo-Car dealers that the 1965 
model cars would h6 delivered on a 6-month lease term, with the 
Econo-dealer having the option to extend the term to 12 months. 
_ (See Plaintiff's Exhibit 10). The ironic part of nlaintiff 's 



complaints with respect to these changes in leasing terms is 
not that changes in leasing terms and arrangements were 
obviously contemplated by the basic franchise agreement, but 
rather that each of these changes would appear to have been 
beneficial to the Econo-Car dealers themselves. These leases 
progressively shortened the lease term and progressively gave 
the local dealers a greater option as to their power to extend 
the lease. As stated in plaintiff *s Exhibit 9, a shorter lease 
term not only enabled the Econo-Car dealers to be in the desir- 
able position position of having the latest model and relative- 
ly new vehicles for rental, but also to effectuate a saving on 
maintenance and service costs which could usually be expected 
to increase with the greater age of the automobile. 

We frankly fail to see where there is any evidence of 
a breach of a contractual provision with regard to the length 
of a lease term, and, if there was such a breach, we fail to 
see wherein plaintiff has proved any damages resulting there- 
from. The flexibility of the Econo-Dealers lease term for the 
1965 (Pltf 's. Exh. 10) automobiles would appear to be just what 
Taute would have wanted. 

2. Insurance Term Provisions . 

The franchise agreement. Plaintiff's Exhibit 6, pro- 
vided that Econo-Car would provide insurance including, among 
other things, collision insurance with no more than $100 deduct- 
ible. This insurance was to be provided at "no additional 
expense". However-,' it should be noted that Taute made only one 
monthly payment to Econo-Car for the rental costs on the auto- 
mobiles and this payment would necessarily include the cost of 



insurance. What happened to the insurance rates and other rates 
is best illustrated by following a two-door Valiant. Plaintiff 
at the time of his Grand Opening paid $129 per month for a two- 
door Valiant. In December, 1963, Econo-Car reduced this 
monthly rental required to be paid by the plaintiff to $118. 
One month later, it announced under letter dated December 26, 
1963 (Pltf 's. Exh. 13) that it was forced to increase its out- 
lay for insurance premiums and that it was finding it necessary 
to pass on an increase to the Econo-dealers of $5 per month. 
As a result, Taute then had to pay $123 for the Valiant that he 
had originally contracted to pay $129 for. 

Under the Court's instructions to the jury (Tr.V.III, 
p. 283) the jury was apparently authorized to award the addi- 
tional amount paid by plaintiff, $5 per car per month, from 
January 1, 1964 through the end of the lease term. This was 
error in that it invaded the province of the jury and actually 
was contrary to the express provisions of the> contract. We 
fail to see how the defendant could be said to have breached 
the contract when during this period it was charging the plain- 
tiff $123 per month for the Valiant when plaintiff had actually 
contracted to pay $129 per month for the Valiant. 

Commencing approximately September 1, 1964, defendant 
effectuated a change in its collision insurance coverage from 
$100 deductible to $250 deductible. In their information cir- 
culars, (Plaintiff's Exhibit 13) Econo-Car explained that they 
were presented witii the choice by the fleet insurance carrier 
to either increase the deductible to $250 or pay an additional 
$8 Der month oer car. Econo-Car elected to ino-rt^aaf^ t-ho 



deductible as was done by their competition. 

The increase in deductible collision coverage would 
have the effect of increasing plaintiff's exposure for collision 
damage from $100 to $250 on those rentals on which he was un- 
able to sell additional insurance to the renter which would 
eliminate any losses in the event of a collision. The auto- 
mobile renter would presumably be responsible in the event that 
his negligence caused the collision damage so that the dealer's 
losses would be reduced to a minimal figure. However, if this 
change were not consented to by plaintiff and did constitute a 
breach of the franchise agreement, the Court's instructions 
allowing the difference between the value of a collision policy 
with a $100 deductible and a policy with a $250 deductible 
would allow the jury to award more than ample damages for this 
alleged breach. (See Tr.V.III, pp. 283-284). 
3. Turn- In Charges . 

Plaintiff has made much of changes in turn- in require- 
ments. It is interesting to note, however, that the original 
franchise agreement contains no specifications with respect to 
turn- ins. It is also interesting to note that plaintiff was 
not relying upon Plaintiff's Exhibit 7 or upon Plaintiff's 
Exhibit 8 as contended at trial, when he protested to Chrysler 
Leasing Corporation's turn- in charges, but rather was relying 
upon Econo-Car's letter dated February 18, 1964. In Plaintiff's 
Exhibit 12 he states: "At this point I will pay only legitimate 
charges as provided for in your letter of February 18, 1964 
'Car Condition- Turn- In of Lease Cars Inspection Guide'." 

When Taute turned in his 1964 automobiles in November 



of 1964, he received invoices from Chrysler Leasing Corporation 
making turn- in charges of several hundred dollars. He immedi- 
ately and vociferously protested to Econo-Car (see Plaintiff's 
Exhibit 12) whereupon Econo-Car interceded with Chrysler Leas- 
ing Corporation and obtained a reduction of or elimination of 
all of these charges. According to plaintiff's own testimony 
his actual damages sustained under his own interpretation of 
the turn- in requirements amount to the cost of one tire, the 
sum of $20.50. (See Tr.V.II, p. 185). More significantly, 
plaintiff's counsel stated in his brief that "the matter was 
satisfactorily taken care of for Taute." (p. 9). Obviously, 
the award by the jury for the alleged breach of contract more 
than included any possible damages incurred under any possible 
breach of arrangements regarding turn- in requirements. 

4. Plaintiff's Claim of Breach of Advertising Provisions . 
Plaintiff complained, rather weakly, that the defendant 
breached the provisions of the contract with respect to adver- 
tising. Some changes were made in the advertising procedures, 
one of which was agreed to by Taute in writing (Pltf 's. Exh. 
15), but the net effect of the advertising changes was to Taute 's 
benefit. Under paragraph 4.F of the franchise agreement Taute 
was to advertise locally, spending a minimum amount of $15 per 
month per car, and that Econo-Car would reimburse Taute upon 
receipt of proof of the local advertising to the extent of 
$7.50 per month per car operated by him. This procedure was 
followed for the first seven months of Taute 's operation through 
May, 1964. In May of 1964 (Tr.V.I, p. 78) a new advertising 
approach was developed by Econo-Car to which Taute agreed in 



writing. Under this approach, Econo-Car would spend $22 per 
car per month, with Taute paying $7,50 of the total amount. 
Thus, the net effect of this change was that Taute paid the 
same, but the company would then pay $14.50 per car instead of 
$7.50 as under the initial arrangement. The program was delayed 
slightly in being effectuated and Taute was allowed to revert 
to the former arrangements for the month of June, 1964. The 
new arrangement was in effect during the months of July and 
August, 1964. 

The advertising arrangements were again changed in the 
fall of 1964 to provide that Econo-Car would pay $22 per month 
per car on the basis of 75% of the local dealer *s fleet. (Tr. 
V.X, p. 84), The net effect of this arrangement would be that 
a total of $16.50 would be spent on local advertising by Econo- 
Car International, Inc. of which $7.50 would be paid by Taute 
and $9 by the company. Thus, even under this arrangement the 
company was paying $1.50 per month per car more than it had 
agreed to under the initial agreement. Advertising was sus- 
pended for the month of September, 1964, but the amounts 
expended by the company on advertising subsequent thereto more 
than made up for the deficit. In fact, during the period from 
July, 1964 through December, 1964, a little bit more than $22 
per car per month had been spent on advertising. (Tr.V.II, 
pp. 221-222). Thus, Taute was spending $7.50 and the company 
was spending $14,50 per month, a total of $7 per month more 
than they were required to under the original contract. Taute 
further testified that the total spent during that period there 
was enough to make up for the deficit for not having had any 



advertisement during the month of September. (Tr.V.II, p. 223), 
The Court was clearly and obviously correct in ruling 
as a matter of law that the defendant had not breached the con- 
tract with respect to the advertising clauses and that plaintiff 
had suffered no damages in connection with the advertising. 

SUMMARY AND CONCLUSION 
The theory of the Court's instructions to the jury on 
the measure of damages allowable for breach of contract was 
correct. This theory was that plaintiff would be entitled to 
all damages proximately caused by any breach of defendant 
limited by what plaintiff would have received had there been 
full performance. Defendant does contend that the Court in- 
vaded the province of the jury in its instruction that the .$5 
increase in rental payments brought on by the increase in insur- 
ance premium to it was a breach of the contract. 
p The trial court should be affirmed on the theory of 
its damage instructions on the breach of contract claim, but 
the judgment on plaintiff's first claim should be reduced by 
the sum of $607.00, the sum allocable to the $5 increase in 
rental payments as of January 1, 1964. 

Respectfully submitted, 

CRO\^fLEY, KILBOURNE, HAUGHEY, 
HANSON & GALLAGHER 




cic Building Cf 



trie Building 
P. 0. Box 2529 

» Billings, Montana 59101 

Attorneys for Defendant and 
Appellant Econo-Car International, 
Inc. 



CERTIFICATE OF MAILING 

I hereby certify that on the 1st day of May, 1968, I 

deposited in the Post Office at Billings, Montana in an envelope 

securely sealed, with postage thereon prepaid, and addressed to: 

John C, Sheehy, Esquire 
Hut ton, Schiltz & Sheehy 
Attorneys at Law 
Electric Building 
Billings, Montana 59101, 

true and correct copies of the foregoing Brief of Defendant 

Econo-Car International, Inc. Answering Brief of Plaintiff Carl 

M, Taute. 



me o£ th^Attbrneys torDeierw^nt and 
Appellant Econo-Car International, Inc. 




I 



I certify that, in connection with the preparation 
of this brief, I have examined Rules 18, 19 and 39 of the 
United States Court of Appeals for the Ninth Circuit, and 
that, in my opinion, the foregoing brief is in full compli- 
ance with those rules. 




Attorney 



NO. 22535 & 22535-A 



UNITED STATES COURT OF APPEALS 
FOR THE NINTH CIRCUIT 



ECONO-CAR INTERNATIONAL, INC., 



vs. 



CARL M. TAUTE, d/b/a ECONO-CAR OF BILLINGS, 



vs. 



ECONO-CAR INTERNATIONAL, INC., 



Appellant, 



Appellee. 



CARL M. TAUTE, d/b/a ECONO-CAR OF BILLINGS, 



Appellant, 



Appellee. 



Appeal from the United States Diistrict Court 
for the District of >lontana, Billings Division 



BRIEF OF APPELLANT ECONO-CAR INTERNATIONAL, INC. IN REPLY 
TO ANSWERING BRIEF OF APPELLEE CARL M. TAUTE 



CROWLEY, KILBOURNE, HAUGHEY, HANSON & GALLAGHER 
500 Electric Building 
P. 0. Box 2529 
Billings, Montana 59101 



Filed 



, 1968 



MAV Z i 19SB 



Clerk 



SUBJECT INDEX 

SUBJECT INDEX i 

TABLE OF CASES ii 

STATUTES ii 

ARGUMENT 1 

A. ADMISSIBILITY OF ORAL REPRESENTATIONS 

ON PLAINTIFF'S FRAUD CLAIM 1 

B. FAILURE OF PROOF OF NECESSARY ELEMENTS 

OF FRAUD 7 

C. WAIVER OF FRAUD 8 

D. COST OF INSURANCE 10 

SUMMARY . . . . 11 

CONCLUSION .......... 12 



TABLE OF CASES 

Page 

Armington v. Stelle 27 Mont. 13, 

69 Pac. 115 (1902) 1 

Continental Oil Co. v. Bell, 94 

Mont. 123, 21 P. 2d 65 (1933) 2 

Cuckovich V. Buckovich, 82 Mont. 

1, 264 Pac. 930 (1928) 7 

Hillman v. Luzon Cafe Co., 49 Mont. 

180, 142 Pac. 641 (1914) 4, 5, 

6, 7 
Hosch V. Howe, 92 Mont. 405, 16 

P. 2d 699 (1932) 2 

Kelly V. Ellis, 39 Mont. 597, 

104 Pac. 873 (1909) 1 

Koch V. Rhodes, 57 Mont. 447, 

188 Pac. 933 (1920) 4, 9 

McNussen v. Graybeal, 146 Mont. 

173, 405 P. 2d 447 (1965) . . .' 4, 5 

New Home Sewing Machine Co. v. Songer, 

91 Mont. 127, 7 P. 2d 238 4, 5 

Ott V. Pace, 43 Mont. 82, 115 Pac. 

37 (1911) . 9 

Reilly v. Maw, 146 Mont. 145, 

405 P. 2d 440 (1965) . 7 

Riddle v. Peck-Williamson Heating 6c 

Vent. Co., 27 Mont. 44, 69 Pac. 241 (1902) ..... 2 

Schied V. Bodinson Mfg. Co., Cal.App. 1947, 

179 P. 2d 380, 385 10 



STATUTES • 

Revised Codes of Montana 1947, 

Section 13-607 . • 1 

Revised Codes of Montana 1947, 

Section 93-401-13 1 



ARGUMENT 

A, Admissibility of Oral Representations 
on Plaintitt s Fraud Claim , 

We will summarize the applicable principles of law 
as well as reply to Taute's argument with respect to the 
question of the admissibility of the oral representations on 
the fraud claim. 

The alleged oral representations were inadmissible 
under the following rules : 

1, The execution of a contract in writing 
supersedes all oral negotiations con- 
cerning its subject matter which pre- 
ceded or accompanied the execution of 
the contract. R.C.M. 1947, § 13-607 . 

2, \<!hen the terms of an agreement have 
been reduced to writing, it is to be 
considered as containing all those terms 
and therefore there can be no evidence of 
the terms of the agreement other than the 
contents of the writing. R.C.M. 1947 , 

§ 93-401-13 . [ 

3, False oral promises or representations 
alleged to have induced a party to enter 
into a contract are not admissible if they 
relate to matters contained in the agree- 
ment. Kelly V. Ellis, 39 Mont. 597, 104 
Pac. 873 (1909 ); Armington v. Stelle. 27 
Mont. 13, 69 Pac. 115 (1902 ); Continental 



Oil Co. V. Bell, 94 Mont. 123, 21 P. 2d 
65 (1933 ). 
4. The parol evidence rule prohibits the 
reception of oral promises or agreements 
made prior to or contemporaneously with 
the execution of a written contract, 
which contradict, change, add to, or 
subtract from the express terms of the 
contract. This rule is applicable to 
oral negotiations which vary the legal 
construction and import of a written 
contract, although they may not contra- 
dict its express terms. Riddell v. Peck - 
Williamson Heating & Vent. Co., 27 Mont . 
44, 69 Pac. 241 (1902 ). 
5, The test as to when parol evidence varies, 
adds to, or contradicts a written contract 
is whether the "particular element of the 
alleged extrinsic negotiation is dealt 
with at all in the writing. If it is 
mentioned, covered or dealt with in the 
writing, then presumably the writing was 
meant to represent all of the transaction 
on that element." Hosch v. Howe, 92 Mont . 
405, 16 P. 2d 699 (1932 ), quoting Professor 
Wigmore. 
We submit that the alleged oral representations here fall 
squarely within the purview of the above rules and are inadmis- 



sible for any purpose. 

Taute contends that the oral representations are 
admissible to explain indefinite, vague or ambiguous provisions 
of the agreement. In response to this assertion, we wish to 
point out that the language of the contract is not ambiguous. 
Even as to the much maligned word "guidance", the meaning of 
which is rather obvious and well known, the contract goes to 
considerable length to spell out what would be done in the 
nature of "guidance". If this contract needs explaining in 
the manner contended for, then any and all contracts need and 
could be legally explained, varied and added to by oral or 
extrinsic evidence. Additionally, even assuming for the pur- 
poses of argument that certain provisions of the contract are 
ambiguous, the alleged oral representations go beyond their 
function and serve to add to, vary and alter the express terms 
of the contract. For example, how could one possible read 
into the language of the contract or offer as an explanation 
of the language of the contract, a promise by Econo-Car to 
spend "every cent" of the $6,000.00 franchise fee in getting 

the operation going? Or, how can it be said that the alleged 

/ ■ 

promise to run three full page newspaper ads does not add to 
the provision in the agreement that "ECONO-CAR places and runs 
at its own expense ads in the ECONO- DEALERS' newspaper to pre- 
pare the area for the new ECONO-DEALER"? It is significant to 
recall that Taute is not contending in this connection that the 
contract as written was not performed, but only that what 
Taute said that Burko said before the contract was signed was 
not performed. 



Taute cites four Montana cases to support his posi- 
tion that the alleged oral misrepresentations were admissible. 
It is not possible to reconcile in all respects the cases 
cited by Taute with the overwhelming number of Montana cases 
excluding evidence of oral representations or oral promises 
under circumstances similar or analogous to the instant case 
discussed on pages 25 to 29 and 45 to 48 of Econo-Car's open- 
ing brief. It is possible, however, to show how even the four 
cases cited by Taute do not support his position here. Taute 's 
four cases are: 

Hillman v« Luzon Cafe Co., 49 Mont. 180 , 
142 Pac. b4i (1^1471 

Koch V. Rhodes j^57 Mont. 447, 188 Pac. 
933 (19207 ; 

New Home Sewing Machine Co. v. Songer , 
91 Mont. 127; 1 P. 2d 238 ; 

McNussen v. Graybeal, .*146 Mont. 173, 405 
:g^.2d 44/ (i9bS) . 

Only two of these cases involve claims of fraud, Hillman v . 
Luzon and Koch v. Rhodes . These are cases in which the alleged 
misrepresentations made were not only statements of existing 
facts (as opposed to promises as to the future performance of a 
party to the contract) , but also were in the nature of guaran- 
tees, warranties or affirmative representations as to the qual- 
ity of the subject of contracts for sale. In Koch v. Rhodes , 
188 Pac. 933, supra , the representations were (1) that the real 
estate involved in the sales transaction contained 158 acres, 
instead of 117 acres as subsequently was discovered, (2) that 
timber claims across the river contained 80 acres of bottom 
land and good pasturage, whereas it was actually a mountainside 



covered with slide rock with little or no bottom land or 
pasturage, and (3) that the vendor had cut over 200 tons of 
hay each year in the past which turned out to be a falsity. In 
Hillman v. Luzon, 142 Pac. 641, supra , the item being sold was 
a gasoline lighting machine and the oral representation admitted 
was that the machine was capable of running all night without 
being refilled, which was false. 

These false representations of existing facts, in the 
nature of guarantees or warranties, present quite a different 
issue than here in Taute v. Econo-Car where the principal 
alleged misrepresentations being complained of are promises of 
performance in the future above and beyond those contained in 
the agreement itself. 

Plaintiff's case McNussen v. Graybeal, 405 P. 2d 447 , 
supra , was strictly breach of contract case in which parol evi- 
dence was admitted to explain an ambiguous term which was not 
explained in the contract and which required extrinsic evidence 
to determine the true meaning. The court determined that the 
words "all milk" in the contract were ambiguous in that it 
could not be determined whether they meant that the defendant 
milk processor was required to buy all milk produced by plain- 
tiff dairy producers (an output contract) or whether it meant 
that a specified price was to be paid for all milk required by 
defendant milk processor (a requirement contract). The court 
held that to determine this question it would be necessary to 
take evidence of all of the circumstances surrounding and pre- 
ceding the signing of the contract. In New Home Sewinp; Machine 
Co. V. Songer, 7 P. 2d 238, supra , the terra "Finance Plan" was 



held to be ambiguous because of one of a party's contention 
that it was a trade name used by the vendor meaning that the 
vendor would send representatives to sell machines at retail 
and give 7 lessons to each retail purchaser thereof. This case 
too, of course, was strictly a breach of contract case and the 
court admitted the evidence on the grounds that extrinsic evi- 
dence was required to explain what the parties understood the 
term to mean, but particularly emphasizing that it was obvious 
that the contract did not contain all of the terms of that 
particular contract. 

In Hillman v. Luzon, 142 Pac. 641, supra , in addition 
to the representations being statements of existing facts in 
the nature of warranties or guarantees, the contract also had 
an ambiguity. The contract provided that the seller guaranteed 
that the machine was capable of doing first class work "up to 
claims". Nowhere in the contract was any explanation made of 
what the claims were. As a part of its reason for admitting 
parol evidence the court pointed out that parol evidence was 
necessary to explain the meaning of the phrase "up to claims" 
without which explanation the phrase would be meaningless. 
This case has an additional interesting aspect with respect to 
Econo-Car's position here for the court also held that it was 
reversable error to admit parol evidence that the vendor had 
represented that the lighting plant was capable of furnishing 
the light required by the vendee at an operating cost of not to 
exceed $35,00 per month, whereas the actual cost of its opera- 
tion was double that amount. The court stated: 



"The contract contains no such warranty 
and the pleadings allege no such representa- 
tion. The only suggestion of any. such thing 
is the averment of a representation that the 
plant 'could be run at a given expense for a 
given length of time', but this is obviously 
inadequate to raise any issue." 49 Mont, at 
185 . ^ 

Thus the court in Hillman v. Luzon Cafe Co., 142 Pac . 
641, supra , clearly acknowledged the necessity in a fraud case 
of pleading and proving all elements of fraud. We again point 
out to the court that probably the most important alleged 
fraudulent oral misrepresentation in the instant case was that 
"every cent" of the $6,000.00 franchise fee would be spent in 
getting the operation going, and that this alleged misrepresen- 
tation had not been pleaded or referred to in any of Taute's 
pre-trial statements of position. 

B, . Failure of Proof of Necessary 
Elements of Fraud 

Taute has failed to indicate where in the record 
there is any evidence to prove that the alleged oral promises, 
if admissible, were made with no intention of performing them. 
This is a most essential element of plaintiff's fraud claim. 
At most, Taute's evidence can be taken to show that oral pro- 
mises were made. But proof that a promise is made and then 
not carried out is no proof that it was made with no intention 
to perform. Reilly v. Maw, 146 Mont. 145, 405 P. 2d 440 (1965 ). 
Nor can fraud be presumed. Rather, good faith is presumed and 
fraud must be proved. Cuckovich v. Buckovich, 82 Mont. 1, 264 
Pac. 930 (1928 ). 

Taute further failed to indicate where in the record 



J 

there is any evidence that plaintiff relied upon the statements 
alleged to have been made. In fact, Taute's actions, includ- 
ing his proceeding under the contract, his statements that he 
had no one to blame but himself and his letters showed his 
utter lack of reliance on the alleged representations. 

Plaintiff's claim for fraud should fail for these 
reasons alone, 

C, Waiver of Fraud 

Taute's counsel has failed to perceive, or has 
ignored, the thrust of defendant's argument that Taute waived 
any right he may have had to sue for damages for fraud, saying 
only that Taute waived his right to rescind, but not his right 
to sue for damages for fraud. Under the facts of this case 
Taute waived, as a matter of law, not only his right to rescind, 
but also his right to recover damages for fraud. 

It is undisputed that Taute knew of the falsity of 
the oral representations nearly two months before he either com- 
menced operations or quit his prior job. At that time the 
agreement was almost wholly executory and could have been 
rescinded without trauma to either party. Instead, Taute, with 
full knowledge, deliberately elected to go ahead and take his 
chances. At a time when he could easily have rescinded, he 
elected to proceed under the contract as written, and, we 
believe at the same time under the circumstances here, waived 
his right to recover any damages for fraud. 

As stated in the very case most heavily relied upon 
by Taute, a party to an executory contract procured by fraud 



"may, after discovering the fraud, either perform it or rescind 
it; and if, with knowledge of the fraud, he elects to perform 
it, this is equivalent to his making a new contract, and to 
permit him under those circumstances to recover for fraud would 
be to do violence to every rule upon which compensatory damages 
are allowed." Koch v. Rhodes, 57 Mont. 447, 188 Pac. 933, 937 , 
938 (1920 ). T-Jhen Taute, with knowledge that the alleged oral 
promises would not be performed, went ahead and performed the 
contract, he in effect made a "new" contract under the rule in 
Koch V. Rhodes, supra , and was then barred from recovery under 
the "old" contract. (Ironically, the "new" contract was the 
"old" contract as written, unmodified by the alleged oral 
promises.) And in Ott v. Pace, 43 Mont. 82, 115 Pac. 37 (1911 ) 
the court said that "the substitution of the new contract for 
the old amounted to a waiver of the fraud which entered into 
the execution of the old one." (115 Pac. at p. 39 ). 

Taute did other things which showed that when he 
elected to go ahead he was affirming the contract as it was 
then understood (as well as originally written) and waiving 
the right to damages for fraud in the inducement under the 
above rule. For example, he signed Exhibit 7, he accepted 
changes in rates, he agreed to advertising changes, he asked 
for assistance and favors, all of which are inconsistent with 
his retaining the right to sue for fraud in the inducement. 
"(W)hen a party claiming to have been defrauded, enters, after 
discovery of the fraud, into new arrangements or engagements 
concerning the subject matter of the contract to which the 
fraud applies, he is deemed to have waived any claim for 



damages on account of the fraud, . , . 'If, after his knowledge 
of what he claims to have been the fraud, he elects not to 
rescind, but to adopt the contract and sue for damages. . . he 
must not ask favors of the other party, or offer to perform the 
contract on conditions which he has no right to exact, and must 
not make any new agreement or engagement respecting it; other- 
wise he waives the alleged fraud,'" Schied v. Bodinson Mfg. Co . 
Cal.App. 1947, 179 P. 2d 380, 385 . 
Taute waived any fraud. 

D. Cost of Insurance 

In Taute 's answering brief, page 23, the statement is made 
that "when Chrysler Leasing reduced its rates to Econo-Car, 
Econo-Car in turn passed that reduction onto Taute," There is 
absolutely no basis in the record, or anywhere else as far as 
we know, for this statement that Chrysler Leasing reduced its 
rates to Econo-Car, This issue has arisen because of the 
court's instruction to the jury that unless they concluded 
that Taute agreed to the increase, the increase of $5,00 per 
month per car for insurance cost, commencing January 1, 1964, 
was a breach of the franchise agreement and that Taute should 
be compensated therefor. To summarize again this aspect of the 
case, Taute was required to make one payment per month per car 
to Econo-Car which payment covered the cost to Econo-Car of the 
insurance Coverage, the rent of the automobile itself, and pre- 
sumably Econo-Car 's overhead and administrative expenses. 
Taking a typical transaction, a Valiant under the original rate 
schedule cost Taute $129.00 per month, Econo-Car reduced this 



it to $123.00 per month as of January 1, 1964, the increase 
being required by the increase in liability insurance premiums 
which Econo-Car was required to make. Both before and after 
these rate changes, Taute made only one payment per month to 
Econo-Car, which payment included all of the charges for his 
use of the automobiles, including the insurance. It is extreme- 
ly difficult to see how Econo-Car could be said to have breached 
the franchise agreement with respect to these rates when at a 
point two and one-half months after Taute 's grand opening Taute 
was having to pay Econo-Car $6.00 per month less per car than 
he had originally agreed to pay. That the Court's conclusion 
that this as a matter of law was a breach of the contract is 
patently erroneous, 

SUMMARY 

As a summary of argument on all points, we are setting 
forth the language of the major headings of Appellant Econo- 
Car 's opening brief argument with the page numbers where each 
topic may be found therein. 

Heading Page 

A. THERE IS NO COMPETENT EVIDENCE TO SUSTAIN' 
THE VERDICT FOR FRAUD (Plaintiff 's JSecond 

Claim) 23 

1, All Testimony of Statements 
Attributed to Burko was Inadmis- . 
sible for the Purpose of Showing 
Fraud in the Inducement of the 
Contract. 23 

2. Plaintiff Failed to Plead and 
Prove All Necessary Elements of 

Fraud. 31 

B. THE JURY WAS IMPROPERLY INSTRUCTED ON THE 
ELEMENTS OF FRAUD 35 



C. THE COURT ERRED IN ALLOWING PLAINTIFF 

TO TESTIFY AS TO ALLEGED MISREPRESENTATIONS 

NOT PLEADED 36 

D. PLAINTIFF WAIVED ANY RIGHT HE MAY HAVE 

HAD TO SUE FOR DAMAGES FOR FRAUD 37 

E. ALL TESTIMONY OF STATEMENTS ATTRIBUTED 
TO BURKO PRIOR TO OR AT THE TIME OF THE 
EXECUTION OF THE \^TRITTEN CONTRACT WAS 
INADMISSIBLE AS VARYING, ADDING TO, 
CONTRADICTING OR ALTERING THE I^trittEN 

CONTRACT 44 

F. THERE WAS NO BREACH OF CONTRACT AS TO 
THE LEASE TERM ARRANGEMENTS AS A MATTER 

OF LAW 49 

G. THE COURT ERRED IN INVADING THE PROVINCE 
OF THE JURY IN ITS INTERPRETATION OF THE 
LEASE TERM PROVISIONS AND THE INSURANCE ' • 

TERM PROVISIONS OF THE CONTRACT 51 



CONCLUSION 

The verdict and judgment on Taute's claim for fraud, 
the second claim, should be reversed arid a judgment rendered 
for defendant Econo-Car International, Inc. thereon. The 
verdict and judgment for plaintiff Taute on his first claim, 
the breach of contract claim, should be reduced by the sum of 
$607.00, the sum allocable to the $5.00 increase in rental 
payments as of January 1, 1964, and otherwise affirmed. 

Respectfully submitted. 

CROWLEY, KILBOURNE, HAUGHEY, 
HANSON & GALLAGHER 



P. 0. Box 2529 

Billings, Montana 59101 
Attorneys for Defendant and 
Appellant Econo-Car Inter- 
national, Inc. 



CERTIFICATE OF MAILING 

I hereby certify that on the cZ/O — day of May, 1968, I 

deposited in the Post Office at Billings, Montana, in an 

envelope securely sealed, with postage thereon prepaid, and 

addressed to: 

John C. Sheehy, Esquire 
Hutton, Schiltz & Sheehy 
Attorneys at Law 
Electric Building 
Billings, Montana 59101, 

true and correct copies of the foregoing Brief of Appellant 

Econo-Car International, Inc. in Reply to Answering Brief of 

Appellee Carl M. Taute. 



One ot tlg^jHAttorneys tor D 



One ot tlg^ Attorneys tor De^ndant 
and Appellant Econo-Car International, 
Inc. 



I certify that, in connection with the preparation 
of this brief, I have examined Rules 18, 19 and 39 of the 
United States Court of Appeals for the Ninth Circuit, and 
that, in my opinion, the foregoing brief is in full compli- 
ance with those rules. 




Attorney 



IN nil: 



F( 



ATFS rOTTRT OF I 1 f^l 
iNlMTH CiHCUll 



MIKE R. PARGA, 



;illf 



VS, 



UNITED STATES OF AMERICA, 

Appellee. 



F\{- 



APPELLEE'S BRIEF 



APPEAL FHOM 

THE UNITED STATES DISTRICT COURT 

FOR THE CENTRAL DISTRICT OF CAUFORNIA 



WM. MATTHEW BYRNE, JR. 
United States Attorney 

ROBERT L. BROSIO 

Assistant United Slates Auurru'y 
Chief, Criminal Division 

RONALD S. MORROW 

Assistant United States Attoi 

1200 I s Courthouse 

312 North Spring Street 

Los Angeles, California 90012 

Telephone: 688-2413 

Attorneys for Appellee 
United States of America 



N O. 2 2 5 3 6 
IN THE UNITED STATES COURT OF APPEALS 
FOR THE NINTH CIRCUIT 

MIKE R. PARC A, 

Appellant, 
vs. 
UNITED STATES OF AMERICA, 

Appellee. 



APPELLEE'S BRIEF 



APPEAL FROM 

THE UNITED STATES DISTRICT COURT 

FOR THE CENTRAL DISTRICT OF CALIFORNIA 



WM. MATTHEW BYRNE, JR. 

United States Attorney 

ROBERT L. BROSIO 

Assistant United States Attorney- 
Chief, Criminal Division 

RONALD S. MORROW 

Assistant United States Attorney 

1200 U. S. Courthouse 

312 North Spring Street 

Los Angeles, California 90012 

Telephone: 688-2413 

Attorneys for Appellee 
United States of America 



TOPICAL INDEX 

Page 

Table of Authorities ii 

I STATEMENT OF JURISDICTION 1 

II APPLICABLE STATUTES 2 

III QUESTION PRESENTED 4 

IV STATEMENT OF FACTS 4 

V ARGUMENT 8 

THERE IS SUBSTANTIAL EVIDENCE TO 

SUPPORT THE CONVICTION. 8 

CONCLUSION 12 



1. 



\ 



TABLE OF AUTHORITIES 

Cases Page 

Brothers v. United States, 

328 F.2d 151 (9th Cir. 1964) 10 

Cellino v. United States, 

276 F. 2d 941 (9th Cir. 1960) 10 

Glasser v. United States, 

315 U. S. 60 (1942) 8 

Hernandez v. United States, 

300 F. 2d 114 (9th Cir. 1962) 9 

Nye & Nissen v. United States, 

168 F. 2d 846 (9th Cir. 1948), 

aff'd 336 U.S. 613 (1949) 8 

Williams v. United States, 

290 F. 2d 451 (9th Cir. 1961) 10 

Statutes 

Title 18 United States Code: 

§3231 2 

Title 21 United States Code: 

§174 11 

§176a 1-2, 10-11 

Title 26 United States Code: 

§4742(a) 1-3 

Title 28 United States Code: 

§1291 2 

§1294 2 



11. 



NO. 2 2 5 3 6 
IN THE UNITED STATES COURT OF APPEALS 
FOR THE NINTH CIRCUIT 

MIKE R. PARC A, 

Appellant, 
vs. 
UNITED STATES OF AMERICA, 

Appellee. 



APPELLEE'S BRIEF 



I 

STATEMENT OF JURISDICTION 

On August 2, 1967, the appellant was indicted in three 
counts by the Federal Grand Jury for the Central District of Cali- 
fornia, for the transportation and facilitation of 100 kilograms of 
marihuana, its sale, and its transfer without receiving an order 
form, in violation of Title 21, United States Code, Section 176a, 
and Title 26, United States Code, Section 4742(a) [C. T. 1].-' Follow 
ing a court trial before the Honorable Charles H. Carr, United 
States District Judge, on October 24, and 25, 1967, Parga was 



1/ "C. T. " refers to Clerk's Transcript. 

1. 



found guilty of Count One of the Indictment, transportation and 
facilitation of marihuana, and on November 20, 1967, he was sen- 
tenced to the custody of the Attorney General for 10 years [C. T. 24] 
After the Government announced it would not proceed on Counts 
2 and 3 a motion for acquital was granted as to those counts. 

There was a notice of appeal filed on November 22, 1967 
[C. T. 25]. 

The District Court had jurisdiction under the provisions of 
Title 18, United States Code, Section 3231, Title 21, United States 
Code, Section 176a, and Title 26, United States Code, Section 
4742(a). 

This Court has jurisdiction to review the judgment pursuant 
to Title 28, United States Code, Sections 1291 and 1294. 



II 
APPLICABLE STATUTES 

Title 21, United States Code, Section 176a provides as 
follows: 

"Notwithstanding any other provision of law, 
whoever knowingly, with intent to defraud the United 
States, imports or brings into the United States mari- 
huana contrary to law, or smuggles or clandestinely 
introduces into the United States marihuana which 
should have been invoiced, or receives, conceals, 
buys, sells, or in any manner facilitates the 

2. 



transportation, concealment, or sale of such mari- 
huana after being imported or brought in, knowing 
the same to have been imported or brought into the 
United States contrary to law, or whoever conspires 
to do any of the foregoing acts, shall be imprisoned 
not less than five or more than twenty years and, in 
addition, may be fined not more than $20, 000, 

"Whenever on trial for a violation of this sub- 
section, the defendant is shown to have or to have had 
the marihuana in his possession, such possession 
shall be deenned sufficient evidence to authorize con- 
viction unless the defendant explains his possession 
to the satisfaction of the jury. 

"As used in this section, the term 'marihuana' 
has the meaning given to such term by section 4761 of 
the Internal Revenue Code of 1954. " 

Title 26, United States Code, Section 4742(a) provides as 
follows : 

"(a) General requirement -- It shall be 
unlawful for any person, whether or not required 
to pay a special tax and register under sections 
4751 to 4753, inclusive, to transfer marihuana, 
except in pursuance of a written order of the per- 
son to whom such marihuana is transferred, on a 
form to be issued in blank for that purpose by the 
Secretary or his delegate. " 

3. 



Ill 

QUESTION PRESENTED 

Whether the evidence was sufficient to sustain conviction 
as to Count One. 



IV 

STATEMENT OF FACTS 

On May 15, 1967, Los Angeles Deputy Sheriff Delia Waddle, 

met with Mike R. Parga and an informant of the Sheriff's Office 

2/ 
at a junk yard in Gardena, California [R.T. 27-29], - At the 

junk yard the informant gave Parga $85 which Waddle had given 

the informant a few minutes before [R. T. 31]. Parga stated he 

did not have any marihuana with him at that time and he would 

have to go to his residence to pick it up [R T. 32]. The three 

proceeded to Parga' s home [R. T. 33]. 

On the way to Parga' s home, Waddle stated that she 
"wanted to make a future purchase of approximately 100 kilos of 
marihuana. I asked Mr. Parga if he could get this for me and he 
said yes, that he could get in unlimited amounts. The amount was 
not in issue. " [R. T. 33]. 

Upon arriving at Parga' s residence, Parga asked Waddle 
and the informant to wait in the living room [R. T. 33]. Parga 



2_l "R. T. " refers to Reporter's Transcript 

4. 



returned to the living room and handed Waddle a package which she 

determined was marihuana [R. T. 34-35]. 

Following the transfer of the marihuana, on the return trip 

to the junk yard, Waddle asked Parga how the marihuana was 

obtained [R. T. 36]. Parga related the following: 

"... I had a conversation in substance with 
Mr. Parga relating how we -- the marihuana was 
brought across the border, and I made the statement 
that wasn't it easy to get caught, and Mr. Parga 
made the statement that if the person didn't know 
that they were carrying it they wouldn't be nervous 
or jittery about it and therefore would not have a 
nervous attitude. 

"I then asked him, 'Well, how would you do 
that ? ' 

"He continued to relate to me a form that it 
was done in the way he said that we take numerous 
cars and trucks across the border, and with numer- 
ous drivers, and he said the drivers do not know who 
is going to be driving it back or who is going to have 
it in their automobiles, and in this way there wouldn't 
be reason for someone to be nervous or jittery, be- 
cause they wouldn't know that it was in their automobile. 

"He said that they had done this in the past, 
that it had worked, and that they -- and that they would 
be doing it again shortly, that they had some buried 

5. 



heroin across the border that they were going to pick 
up before too long and that they would be going down 
to do it. " [R. T. 36-37]. 

Upon returning to the junk yard Waddle asked Parga how 
she would contact him for the future purchase [R. T. 38]. Parga 
said she could call him when she had gotten the money [R. T. 38]. 

On May 25, 1967, Waddle met with Parga and said she had 
not been able to acquire the money for the kilos [R. T. 40], When 
she asked if everything was "still go" he said yes and that "they 
had gone through 27 kilos that week" [R. T. 40-41]. 

Between May 25th and June 27th, the date in the indictment, 
Waddle had a number of phone conversations with Parga [R. T. 41, 
43, 59-60]. 

On June 27, 1967, Los Angeles Deputy Sheriff Ramon 
Velasquez went with the informant to the Horseshoe Club in Gar- 
dena, California, at approximately 8:00 P.M. [R. T. 67]. Later 
defendants Bonney and Parga joined them [R. T. 67-69]. The 
informant introduced Parga to Velasquez and then Parga intro- 
duced Bonney to Velasquez [R. T. 69]. 

After a brief conversation relative to other matters, Parga 
stated, "let's get down to business. " [R. T. 70]. When Velasquez 
asked how the transaction was to be consummated Bonney said the 
four men would leave and go to a garage where he and Parga would 

6. 



load the deputy's car [R. T. 70]. "As soon as I was satisfied that 
there were 100 kilos of marihuana in there, I would pay Mr. Parga, 
that he [Bonney] did not want to touch the money, that the money 
was to go to Mr. Parga. " [R. T. 70]. When Velasquez objected to 
the arrangement because he wasn't going to take $6, 500 "anyplace" 
Bonney decided to get it by himself [R. T. 70-71]. Bonney told 
Velasquez, the informant, and Parga to wait for him at the Kings 
Inn, next door to the Horseshoe Club [R. T. 71]. Velasquez then 
gave Bonney the keys to his car and watched Bonney drive south 
on Vermont Avenue [R. T. 72], 

Velasquez, Parga and the informant proceeded to the Kings 
Inn where Parga related the following: 

"We initially had a conversation with Mr. Parga 
where he told me that they took care of business the 
right way. If the 100 kilos was short in any way, one 
or two kilos short, to call them or him and he would 
make the short amount good. 

"We also had another conversation with regards 
to Mr. Bonney losing $5, 000 the prior month and also 
an amount of two tons of marihuana somieplace in 
Mexico. ..." [R. T. 73]. 

Eldon G. Burkett, of the Los Angeles County Sheriff's 
Office followed Bonney and saw Bonney and AdoLfo Carbajal, the 
third defendant, load miarihuana into Velasquez' car and return 
it to the Kings Inn [R. T. 95-102]. 

7. 



At approximately 10:00 P. M. , Bonney appeared at the 
Kings Inn [R. T. 74], and Bonney asked Parga if he [Parga] had 
seen the money [R. T. 76]. When Parga answered in the negative, 
Velasquez said the narcotics would have to be seen before the 
$6, 500 would be paid [R. T. 76]. Bonney and the informant then 
went out to the car [R. T. 76]. In fifteen minutes the pair reap- 
peared [R. T. 76], the informant gave a prearranged signal, and 
Parga and Bonney were arrested [R. T. 77]. 

Velasquez later went to his vehicle, opened the trunk, and 
found seven cardboard boxes of marihuana wrapped in differently 
colored paper packages [R. T. 78; Exs. 2, 3, 4, 5, 6, 7; Stipula- 
tion at R. T. 82; Stipulation at R. T. 83]. 

V 

ARGUMENT 



THERE IS SUBSTANTIAL EVIDENCE TO 
SUPPORT THE CONVICTION 



A judgment of conviction must be sustained if, taking the 
view miost favorable to the Government, there is substantial evi- 
dence to support it. 

Glasser v. United States , 315U. S. 60, 80(1942); 
Nye & Nissen v. United States , 168 F. 2d 846 

(9th Cir. 1948), aff 'd. 336 U. S. 613 (1949). 
Appellant's position on this appeal is that the Government 
failed to prove that Parga had possession, either actual or 

8. 



constructive, of the marihuana in question and, therefore, the 
presumption of illegal importation and knowledge thereof was not 
a part of this case. 

Initially, the conviction can be sustained without any refer- 
ence to the "presumption" if the evidence shows that Parga knew 
the marihuana was illegally imported. Appellant, in his brief, 
places reliance on Hernandez v. United States, 300 F. 2d 114 
(9th Cir. 1962). Hernandez , at 124, says that its holding "does 
not concern those whose knowledge of the illegal importation of 
the narcotic drugs can be shown by direct or circumstantial evi - 
dence, without reliance upon the presumption based upon posses- 
sion . . . The rule which we announce relates only to that defen- 
dant who is not shown, directly or by circumstantial proof, to have 
had knowledge of the source of the narcotic drugs, or to have had 
their physical custody, and whose role in the scheme, if any, is so 
minor as not to support an inference that he shared in the control 
of the narcotic drugs. ..." 

In Hernandez the trial court found "there was no proof that 
the defendant personally had knowledge that the heroin was illegally 
imported and no proof that defendant personally had possession of 
the narcotics from which such knowledge could be presumed, " 
300 F. 2d at 120. 

In the instant case, Parga had, as shown by the evidence, 
both actual knowledge of the illegal importation of the marihuana 
and constructive possession of it. Parga knew that the marihuana 
was smuggled in from Mexico by his explanation of his practice 

9. 



and procedure. Judge Carr's finding of guilt is based, in part, on 
the testimony of Delia Waddle relative to Parga's statement of the 
"defendant bringing in this marihuana from Mexico" [R. T. 183]. 

The presumption of Section 176a does apply to the instant 
case. Parga had constructive possession by virtue of his ability 
to deliver marihuana as he said he could. The fact is that he 
produced the marihuana at this time and place promised, even 
though he did not physically drive it to the spot. It is to be noted 
that it was only because of Deputy Velasquez' protestations that 
Parga did not load his car with the marihuana. 

In Cellino v. United States , 276 F. 2d 941 (9th Cir. 1960), 
the saraie Deputy Sheriff Velasquez was involved. In that case this 
Court said, "Where a defendant negotiates a sale and receives the 
purchase price, he has possession through dominion and control, 
even though delivery is made by another and there is no evidence 
the seller ever had actual possession" 276 F. 2d at 95. In the 
present case Parga negotiated the sale and was to receive the 
money except for the fact the arrest took place just prior thereto. 

Appellant relies on Williams v. United States, 290 F. 2d 
451 (9th Cir. 1961) to show lack of possession in the instant case. 
In a discussion of Williams by the Ninth Circuit in Brothers v. 
United States, 328 F. 2d 151 (9th Cir. 1964), the following 
appears, at 156: 

"In holding that, under this testimony, 

Williams was not shown to have constructive 

possession of the narcotics in the refuse can, 

10. 



the court emphasized the fact that no sale of nar - 
cotics between McCormick and Williams had been 
arranged. Williams the court said, was only con- 
templating entering into a partnership with the in- 
former for the future sale of narcotics to third 
persons. 'We have no doubt, ' this court said, 
'the appellant either had dealt, or planned to deal 
in the future, in marijuana. But that does not prove 
possession of the two kilograms of marijuana on 
July 20, 1959, the date charged. 290 F. 2d at 453. 
The court, in Williams expressly reaffirmed the 
holdings of this court in Rodella v. United States, 
supra. 

"The Williams case, therefore, is distin- 
guishable from the case before us, where effective 
dominion and control was exercised over the nar- 
cotics as a means of consummating a sale already 
arranged. We hold that, here, the evidence of con- 
structive possession of the narcotic drugs was ade- 
quate to warrant application of section 174 presump- 
tion. " 

In the instant case it is legally insignificant that the 
money, as planned, was not handed to Parga, or that the pre^ 
sumption of Section 176a rather than Section 174 is involved. 



11. 



The evidence shows not only knowledge on Parga's part, 
but also his joint possession with Bonney and his power to control 
it by having it delivered as he said he could. 

CONCLUSION 

For the above stated reasons, the judgment of the District 

Court should be affirmed. 

Respectfully submitted, 

WM. MATTHEW BYRNE, JR. 
United States Attorney 

ROBERT L. BROSIO 

Assistant United States Attorney 
Chief, Criminal Division 

RONALD S. MORROW 

Assistant United States Attorney 

Attorneys for Appellee 
United States of America 



12. 



/ 

No. 22537 
IN THE 



United States Couft of Appeals 

FOR THE NINTH CIRCUIT 



In the Matter of 

Haldeman Pipe & Supply Company, a corporation, 

Debtor. 



On Appeal From the United States District Court of the 
Central District of California. 



APPELLANT'S OPENING BRIEF. 



Beardsley, Hufstedler & Kemble, 
By Stephen R. Farrand, 
458 South Spring Street, 

Los Angeles, CaHf. 90013, FILED 

Attorneys for Appellant, 

Haskell H. Grodberg. ^pR 2 9 1968 

WM. B. LUCK, CLERK 

Parker & Son, Inc., Law Printers, Los Angeles. Phone MA. 6-917L 



TOPICAL INDEX 

Page 

Statement of Jurisdiction 1 

Statement of the Case 2 

Statement of the Facts 3 

Specification of Errors 9 

Summary of Argument 12 

Questions Presented 15 

Argument 17 

I. 
Section 44(c) of the Bankruptcy Act Expressly 
Does Not Disqualify Appellant From Repre- 
senting at the Same Time a Receiver and 
Several General Creditors of the Corporate 
Debtor, One of Whom Has Its Claim Guaran- 
teed by the Principal Shareholders of Such 
Debtor 17 

(1) Subdivision (c) Was Added to Section 44 
to Specifically Permit an Attorney to Rep- 
resent Both the Receiver and a General 
Creditor Where Only the Possibility of a 
Conflict of Interest Exists 17 

(2) The Fact That One of the General Credi- 
tors Represented by Appellant Held a Per- 
sonal Guarantee of Its Claim Executed by 
the Principal Shareholders of the Corpo- 
rate Debtor, Does Not Disqualify Appel- 
lant From Representing the Receiver 22 

(3) Neither In re Woodruff, 121 F. 2d 152 
(1941), nor Woods v. City National Bank 
& Trust Co. of Chicago, 312 U.S. 262 
(1940), Supports the Proposition That the 
"Mere Possibility" of a ConfHct of Interest 
Prevents an Attorney From Representing 
Both the Receiver and a General Creditor .. 26 



11. 

II. Page 

The Affidavit Filed by Appellant in Conjunction 
With the Application for His Employment as 
Counsel for the Receiver Contained All Facts 
Then Known to Appellant Which Might Rea- 
sonably Give Rise to a Conflict of Interest and 
Therefore Complied With the Requirements of 
General Order 44 32 

III. 
Appellant's Representation of Amstan Did Not in 
Fact Conflict With His Representation of the 
Receiver, and Therefore the Court Does Not 
Have the Discretion Under General Order 44 to 
Deny Appellant the Reasonable Value of His 
Services 37 

(1) Itemlab, Inc., 257 F. Supp. 765 (1966), 
and Cal-Neva Lodge, Inc. Both Require 
That There Be an Actual Conflict of In- 
terest, Not the Possibility of One, Before 
the Court Has the Discretion to Deny Fees 
Under General Order 44 37 

(2) Appellant Did Not Without Disclosure 
Represent an Interest Adverse to the Re- 
ceiver in a Matter Upon Which He Was 
Employed for Such Receiver, in That 
When the Possibility of a Conflict Ap- 
peared, Special Counsel Was Appointed .— 42 

( 3 ) An Action Filed by Special Counsel Against 
the Manildis Was Settled With Court Ap- 
proval Without Establishing That the Ma- 
nildis Were Liable to the Receiver for 
Diverting Assets of the Corporate Debtor .. 46 

(4) Appellant's Representation of the Receiver 
Until the Time Special Counsel Was Ap- 



111. 

Page 
pointed in No Way Conflicted With the 
Receiver's Possible Rights to Recover As- 
sets From the Manildis 50 

IV. 
The Denial of Reasonable Compensation to Appel- 
lant for His Representation of the Receiver 
Constitutes an Abuse of Any Discretion the 
Court May Be Given by General Order 44 54 

(1) Woodruff, 121 F. 2d 152 (1941), and 
Barry Yao Company, 172 F. Supp. 375 
(1959), Do Not Support the Referee's 
and the District Court's Decision That in 
the Case at Bar, General Order 44 Re- 
quires the Denial of All Fees to Appellant .. 54 

(2) Chicago & West Town's Railway v. Fried- 
man, 230 F. 2d 364 (1956), and In re 
Philadelphia W. Ry. Co., IZ F. Supp. 169 
(1947), Are Controlling and Set Forth the 
General Rule 57 

(i) Once the Possibility of a ConfHct of 
Interest Arises, an Attorney Should 
Withdraw as Appellant Did in the 
Case at Bar 57 

(ii) An Attorney Should Be Compensated 
for Beneficial Service Performed 
Which Are Unrelated to the Matter 
Giving Rise to the PossibiHty of a 
Conflict 57 

Conclusion 62 

Appendix A. Cal-Neva Lodge, Inc., a Nevada Cor- 
poration, C.C.H. Reports, Para. 62,347 (1967) 
App. p. 1 



IV. 

TABLE OF AUTHORITIES CITED 

Cases Page 

Barry Yao Company, In re, 172 F. Supp. 375 55 

Carlisle Packing Co., Matter of, 12 F. Supp. 8 

19, 21, 23, 31 

Chicago & West Town's Railway v. Friedman, 
230 F. 2d 364 ' 57, 58, 59 

Doehler Die Casting Co. v. Holmes, 52 N.Y.S. 2d 
321 22 

Hodges, Matter of, 23 A.M.B.R. (X.S.) 266, 4 F. 
Supp. 804, aff'd 25 A.M.B.R. (N.S.) 346, 70 
F. 2d 243 18 

Itemlab, Inc., In the Matter of, 257 F. Supp. 765 .... 38 

L.M. Axle Co., Matter of. 5 A.M.B.R. (N.S.) 734, 
3 F. 2d 581 18 

Philadelphia & W. Ry. Co., In re, 7Z F. Supp. 169 
29, 31. 58, 60 

Rury, In re. 5 A.B.R. (N.S.) 295, 2 F. 2d 330 19 

West Co. V. Lea Bros. & Co., 174 U.S. 590, 19 S. 
Ct. 836. 43 L. Ed. 1098 17 

Woodruff, In re, 121 F. 2d 152 26, 28, 31, 55 

Woods V. City National Bank & Trust Co. of Chi- 
cago, 312 U.S. 262 26, 28, 29, 31 

Miscellaneous 

Cal-Neva Lodge, Inc., C.C.H. Reports, Para. 
62,347 (1967) 21. 24. 41 

General Order No. 21(6) 19 

General Order No. 44 2, 12, 13, 14, 15 

19, 21, 24, 27, 32, 34, 35, 36 

Z7, 38, 50, 54, 55, 56, 57, 61 



V. 

Page 

House Report 1289, 74th Cong., 2d Sess. (1936), 
p. 157 19, 21 

House Report 1289, 74th Cong., 2d Sess. (1936), 
p. 158 21 

Statutes 

Bankruptcy Act, Sec. 24(a) 1 

Bankruptcy Act, Sec. 30 17, 18 

Bankruptcy Act, Sec. 38(6) 1 

Bankruptcy Act, Sec. 39(c) 1 

Bankruptcy Act, Sec. 44(c) 13, 17, 19, 20 

21, 23, 24, 31, 61 

Bankruptcy Act, Sec. 62(d) 56 

Bankruptcy Act, Sec. 322 2 

Bankruptcy Act of 1938, ch. 575, Sec. 1, 52 Stat. 

860 17 

Public Law 88-623, 78 Stat. 1001 18 

United States Code, Title 11, Sec. 47 1 

United States Code, Title 11, Sec. 66 1 

United States Code, Title 11, Sec. 67 1 

Textbooks 

Collier Bankruptcy Manual (Matthew Bender & Co. 
1965), pp. 395-395.1 18 



No. 22537 
IN THE 



United States Couft of Appeals 

FOR THE NINTH CIRCUIT 



In the Matter of 

Haldeman Pipe & Supply Company, a corporation, 

Debtor. 



On Appeal From the United States District Court of the 
Central District of California. 



APPELLANT'S OPENING BRIEF. 



Statement of Jurisdiction. 

This is an appeal by an Attorney for a Receiver in a 
proceeding under Chapter XI of the Bankruptcy Act. 
The appeal is from an Order of the Bankruptcy Ref- 
eree — as affirmed by the District Court — denying all 
compensation for legal services rendered to the Re- 
ceiver in the course of the said proceeeding. 

The Referee's jurisdiction to set the fee rests on 
Section 38(6) of the Bankruptcy Act (11 U.S.C. Sec- 
tion 66) . 

The District Court's jurisdiction to review the Order 
of the Referee rests on Section 39(c) of the Bank- 
ruptcy Act (11 U.S.C. Section 67). 

This Court's jurisdiction rests on Section 24(a) of 
the Bankruptcy Act (11 U.S.C. Section 47). 



Statement of the Case. 

The within proceeding- was filed under the provisions 
of Chapter XI, Section 322, of the Bankruptcy Act 
on May 31, 1963. 

A. J. Bumb was appointed Receiver on the same date, 
and Appellant was employed as Attorney for the Re- 
ceiver by an Order made and entered on June 6, 1963. 

Thereafter, Appellant performed extensive legal serv- 
ices on behalf of the Receiver in a variety of matters 
for a period of approximately three years. 

Following the filing of an Application for Compensa- 
tion by Appellant, an Order was made and entered 
on June 15, 1967, which denied to Appellant any com- 
pensation for the services he had rendered on the 
ground that he had represented a general creditor whose 
claim was guaranteed by the principal shareholders of 
the corporate debtor, and as a result there was the 
possibility of a conflict of interest when the Receiver 
later attempted to recover assets from such principals 
on behalf of the corporate debtor. 

Said Order recites that the fair and reasonable value 
of the services rendered to the Receiver by Appellant 
is the sum of $12,500.00. However, the Referee in 
Bankruptcy found that Appellant had failed to comply 
with the requirements of General Order 44, and as a 
result, the Court was required to disallow the entire 
compensation to which Appellant might otherwise be 
entitled. 

On July 3, 1967, being within an extended time fixed 
by the Court, Appellant filed a Petition for Review of 
that portion of said Order disallowing all compen- 
sation. On August 16, 1967, the Referee filed his Cer- 
tificate on Petition for Review. 

On October 31, 1967, the United States District 
Court entered its Order Affirming the Order of the 



— 3— 

Referee in Bankruptcy, approving and adopting the 
Referee's Findings of Fact and Conclusions of Law filed 
in connection therewith, and dismissing the Petition for 
Review. 

On November 14, 1967. Appellant filed a Notice of 
Appeal to the United States Court of Appeals for the 
Ninth Circuit from the District Court's Order. 

Statement of the Facts. 

On May 28, 1963, Appellant received a telephone 
call from Chicago from one William Collen (hereinafter 
referred to as "Collen"). Collen was an attorney in the 
firm of Collen, Kessler and Kadison, who represented 
Manufacturers Clearing House and who. as a result, 
represented approximately ten creditors of Haldeman 
Pipe & Supply Company, a California corporation 
(hereinafter referred to as "Haldeman"). 

Prior to the aforementioned telephone call, and on 
May 24, 1963, Collen had been present at a meeting of 
Haldeman's larger creditors, which was held in Los 
Angeles. Haldeman had been having difficulties in 
meeting its obligations, and the purpose of the meet- 
ing was to work out a settlement arrangement. At 
that time, one Leonard Goldman, an attorney in Los 
Angeles, was representing Haldeman. 

During the aforementioned phone call, Collen told 
Appellant the name of the creditors whom he repre- 
sented, and asked if Appellant would represent them 
locally as he could not keep running out to Los An- 
geles in order to keep track of the status of the nego- 
tiations. 

Appellant agreed with Collen to undertake such rep- 
resentation and, per Collen's request, placed a call to 
Goldman in order to ascertain the posture of the pro- 
posed settlement arrangements. During this phone con- 



-A— 

versation, Goldman mentioned that there were diffi- 
culties in working out the proposed settlement arrange- 
ment, that he remembered Collen as representing a sub- 
stantial number of creditors, and now that Appellant 
represented said creditors, he would keep Appellant 
posted. 

On or about May 30, 1963, Goldman called Appel- 
lant and indicated that he intended to file on behalf of 
Haldeman a Petition under Chapter XI of the Bank- 
ruptcy Act. He further stated that it would be in the 
best interest of all of the creditors if Haldeman con- 
tinued in operation by means of a Receiver. Goldman 
indicated that, since Appellant apparently represented 
major creditors of Haldeman, Appellant would be well 
advised to accompany him and discuss the matter with 
the Referee to whom the case would be referred. 

On May 31, 1963, Goldman filed the Petition under 
Chapter XI, and immediately thereafter on the same 
day, along with Appellant, met with the Hon. Russell 
B. Seymour, the Referee to whom the matter was re- 
ferred. During the course of said meeting. Referee 
Seymour called A. J. Bumb and requested him to act as 
Receiver for the estate. Mr. Bumb consented and was 
thereupon immediately appointed. Mr. Bumb asked the 
name of the attorney representing some of the larger 
creditors, and when Appellant was mentioned, requested 
that Appellant prepare an application for his employ- 
ment as counsel for the Receiver. 

The major portion of the meeting was spent dis- 
cussing, in a general way, the problems involved in 
the proceeding. As Appellant had not known Collen 
prior to the telephone conversation on May 28, 1963, 
and had never represented, prior to that time, any of 
the creditors referred to him by Collen, Appellant's 
knowledge of the problems involved was extremely lim- 
ited. 



— 5— 

Subsequently, on May 31, 1963, Appellant prepared 
an Application for the signature of the Receiver, for an 
Order authorizing the Receiver to employ Appellant as 
his counsel, as well as an Affidavit signed and sworn 
to by Appellant, which Affidavit recites, inter alia, the 
following : 

"That affiant represents certain unsecured credi- 
tors whose interest, so far as known to affiant, 
are identical to those of the Receiver herein; that 
affiant does not represent any interest which is 
adverse to the Receiver or to the creditors herein. 

On May 31, 1963, Appellant mailed the Application, 
including his Affidavit, to the Receiver for his signa- 
ture. On June 4, 1963, Appellant received a second tele- 
phone call from Collen in Chicago, in the course of 
which Collen informed Appellant that one of the credi- 
tors which he had referred held a personal guarantee 
of its claim by Jack Manildi (hereinafter referred to 
as "Manildi"), who was the President and principal 
shareholder of Haldeman. Collen stated that he did 
not know whether Mrs. Manildi had signed the guar- 
antee in that he did not have it in his possession, 
but that he would endeavor to obtain it. 

During said call, Collen requested Appellant to file 
an action on the guarantee at the earliest possible mo- 
ment, and in connection therewith, to promptly levy at- 
tachments on certain parcels of real property standing in 
the name of Manildi, in that he had heard that certain 
other creditors of Haldeman also held personal guar- 
antees executed by Manildi, and that one such creditor 
had already attached. 

Subsequent to the aforementioned phone conversa- 
tion, and on the same day, Appellant reported and 
stated to the Receiver in the presence of Goldman that 



one of the creditors he represented held a personal guar- 
antee executed by Manildi. 

The following day, on June 5, 1963, Collen sent a 
letter to Appellant, which included a copy of the guar- 
antee, which in fact was executed by both Mr. and Mrs. 
Manildi. 

As was previously mentioned, on June 6, 1963, an 
Order was entered authorizing the employment of Ap- 
pellant as counsel for the Receiver. On or about June 
8, 1963, Appellant received Collen's letter, including the 
copy of the guarantee, and proceeded to draft a Com- 
plaint against the Manildis and the necessary docu- 
ments to effectuate an attachment of real property 
standing in their names. This Complaint was filed on 
June 10, 1963. and the levies of attachment were 
made shortly thereafter. 

Prior to Appellant's employment as counsel for the 
Receiver, and during the meeting held with Referee 
Seymour on May 31, 1963, Appellant was informed 
by Goldman that an account receivable existed in favor 
of Haldeman and against a corporation known as Santa 
Monica Plumbing & Supply Co. (hereafter referred to 
as "Santa Monica"), and that Haldeman and Santa 
Monica were related corporations. 

Subsequently, and during the course of the Receiver's 
administration, rumors arose that other claims against 
Santa Monica might exist in favor of Haldeman. In 
order to substantiate or dismiss these assertions, shortly 
prior to July 26, 1963, the Receiver suggested that Ap- 
pellant prepare an Aplication for an Order authoriz- 
ing the employment of an auditor to investigate, among 
other things, transfers between Santa Monica, Manildi 
and Haldeman. On July 29, 1963, an Order was en- 
tered based on said Application authorizing the Re- 
ceiver's employment of one Albert Kramer (hereinafter 



referred to as "Kramer"), for the purposes set forth 
.hereinabove. 

On August 19, 1963, a conference was held attended 
by Kramer, the Receiver, Appellant, and Hubert F. 
Laugharn (hereinafter referred to as "Laugharn"), 
who was attorney for a Court-appointed Unsecured 
Creditors' Committee. Kramer orally reported that in 
his opinion it appeared likely that Haldeman had claims 
against Santa Monica and, although he had not com- 
pleted his investigation at that point, his suspicions were 
aroused as to whether there also might be claims against 
the Manildis individually. According to Kramer, these 
suspicions against the Manildis were sufficient to war- 
rant proceeding with further investigation. 

Immediately following the aforementioned meeting. 
Appellant conferred with the Receiver. At that time, 
neither the Receiver nor Appellant knew whether 
claims would actually develop against the Manildis. 
However, due to the fact that Appellant represented a 
general creditor whose claim was guaranteed by the 
Manildis, it was agreed that the Receiver should have 
independent advice as to the nature and validity of 
those claims. 

Thereafter, and on or about August 30, 1963, the 
Court authorized the Receiver to employ Laugharn as 
Special Counsel to 

"[p]ursue and conclude the said [Kramer's] in- 
vestigations and, should the facts so warrant to 
institute in the name of the Receiver as plaintiff, 
appropriate proceedings to recover any assets or 
sums of money which the debtor and/or the Re- 
ceiver may be entitled to receive from Santa 
Monica Plumbing Supply Company and Tack Man- 
ildi and Vina Gale Manildi." [Clerk's Record, 
p. 54.] 



At or about the time Appellant filed the Complaint 
on the guarantee on June 10. 1963. several other credi- 
tors of Haldeman. whose claims were also guaranteed 
by the Manildis. were attempting to levy on the same 
real property. As a result of this 'Vace" to attach, 
none of the guaranteed creditors was absolutely sure 
of the priority of its levy. As a result, in the latter 
part of June, 1963. negotiations were commenced 
between the guaranteed creditors, including the one rep- 
resented by Appellant, which ultimately resulted in the 
creation of a "Guaranteed Creditors Trust" (herein- 
after called the "Leland Trust"). 

The real property which had been attached by some 
or all of the guaranteed creditors became the corpus of 
this trust, and the Manildis were relieved from further 
liability imder their guarantees, despite the fact that 
they owned other substantial assets which were not in- 
cluded in the trust corpus. Furthermore, as Kramer 
had raised the possibility that the ]\Ianildis might be li- 
able to Haldeman. the effectiveness of the Leland Trust 
was conditioned on Court approval. 

On September 23, 1963, Laugharn representing the 
votes necessary to constitute a majority in number and 
amount voted in favor of a Plan of Arrangement 
which had the effect of relinquishing any rights the Re- 
ceiver may have had in the real property constituting 
the corpus of the Leland Trust. On September 27, 
1963, the Referee made and entered his Order con- 
firming said Plan of Arrangement. Laugharn, as 
Special Counsel for the Receiver, had previously there- 
to on September 23. 1963. filed an action against Santa 
Monica and the ^Manildis. 

This litigation was settled and compromised by the 
payment by Santa Monica to the Receiver of the sum 
of $32,000. This sum was paid from Santa Monica's 



— 9— 

accounts receivable, which had been collected and im- 
pounded in a special trust account, and the balance in 
said account was released to Santa Monica. No part 
of the settlement sum was paid by the Manildis individ- 
ually, nor have they ever been adjudicated bankrupt. 

Specification of Errors. 

1. The Referee and the District Court erred in hold- 
ing: 

(a) That there was a possibility that appellant knew 
of the existence of the guarantee, or that he had 
discussed the matter of a suit against Manildi 
prior to June 4. 1963. [Finding of Fact 7.] By 
finding that appellant knew other facts, except- 
ing possibly the ones recited above, as of May 
31, 1963, the court erroneously creates the infer- 
ence that evidence was presented which would 
in some way support such speculation. There is 
no such evidence. 

(b) That at least some of the real property upon 
which appellant caused attachments to be levied 
was subsequently sought to be recovered by the 
receiver in his Superior Court Action No. 825 
741. [Finding of Fact 10.] The real property 
upon which appellant caused attachments to be 
levied became part of the corpus of the "Leland 
Trust". [Finding of Fact 16.] The effective- 
ness of this trust was recognized and approved 
by the court's order of September 27, 1963 
[Finding of Fact 17], which order also re- 
served to the receiver the causes of action as- 
serted in Superior Court Action No. 825741. 
[Finding of Fact 17.] It is logically incon- 
sistent for the court to find that it authorized 
the receiver to attempt to recover certain real 
property (upon which appellant caused attach- 



—10— 

ments to be levied), and at the time of grant- 
ing the receiver such authorization, also approved 
the setting aside of this same real property in a 
trust, beyond the receiver's reach. While the re- 
ceiver may have been authorized by the court to 
attempt to recover real property standing in the 
name of the Manildis, such real property could 
never have been the real property upon which 
appellant had caused attachments to be levied. 

(c) That following the meeting with the accountant 
(Kramer) on August 19, 1963, appellant "for 
the first time," (Emphasis the court's) notified 
the receiver that he had sued the Manildis and 
attached real property standing in their names 
on behalf of a general creditors, which had the 
Manildis' guarantee. [Finding of Fact 13.] 
There is no evidence to support the finding that 
this was the "first time" appellant had informed 
the receiver of this suit and attachment. Ex- 
actly the opposite conclusion is indicated by other 
findings of fact. Finding of Fact 15 states that 
appellant ". . . mentioned that he represented a 
'guarantee' creditor during the course of one of 
several hearings in connection with the first 
meeting of creditors. . . ." 

Finding of Fact 11 states that on June 4, 1963, 
appellant "mentioned following a meeting at the 
Bank of America, that one of the creditors he 
represented had a personal guarantee executed 
by the Manildis." 

Furthermore, appellant testified that he had in- 
formed the receiver of this suit and attachment 
on several occasions prior to the meeting on Au- 
gust 19, 1963, and the receiver never testified to 
the contrary. (In fact, the receiver never tes- 



—11— 

tified at any of the three hearings held before 
the referee in regard to this matter.) 
In conclusion, there is no evidence to support the 
finding that appellant "for the first time" fol- 
lowing the meeting on August 19, 1963, in- 
formed the receiver of the suit and levy of at- 
tachment referred to in Finding of Fact 13. 

2. The Referee and the District Court erred in 
holding that there was an actual, if not yet known, con- 
flict of interest between a receiver on one hand and a 
general creditor (Amstan) which holds a guarantee of 
its debt executed by principals of the corporate debtor. 
[Finding of Fact 20, Conclusion of Law 1.] 

3(a). The Referee and the District Court erred in 
holding that on or before June 6, 1963, appellant knew 
that his representation of the receiver then was in sub- 
stantial conflict with his representation of Amstan. 
[Finding of Fact 21, Conclusion of Law 2.] 

(b) The Referee and the District Court erred in 
holding that on or before June 6, 1963, appellant 
"should have known" that his representation of the re- 
ceiver would be, "or at least might become," in substan- 
tial conflict with his representation of Amstan. [Finding 
of Fact 21, Conclusion of Law 2.] 

4. The Referee and the District Court erred in hold- 
ing that appellant's representation of Amstan, in con- 
nection with which he sought to recover from the 
Manildis, was in substantial conflict with the receiver's 
possible right to recover from the Manildis. [Conclusion 
of Law 3.] 

5. The Referee and the District Court erred in hold- 
ing that Amstan's levy of attachment on real property 
standing in the name of the Manildis reduced, and 
miHtated against, the receiver's ability to effect collec- 



—12— 

tion of any claim or cause of action he may have 
had against the Manildis. [Conclusion of Law 4.] 

6. The Referee and the District Court erred in 
holding that appellant's failure to set out in his affidavit 
the specific facts relating to appellant's representation 
of Amstan, and its claim against the Manildis, consti- 
tutes a substantial violation of, and noncompliance with 
the provisions of General Order 44. [Conclusion of Law 
5.] 

7. The Referee and the District Court erred in hold- 
ing that appellant's failure to set out in his affidavit 
the specific facts regarding his represention of Amstan, 
its claims against the Manildis, and the relationships 
between the Manildis, Santa Monica Plumbing and 
Supply Co., and the corporate debtor, requires disallow- 
ance of any compensation to which appellant might 
otherwise be entitled as attorney for the receiver. [Con- 
clusion of Law 5.] 

Summary of Argument. 

The Referee and the District Court have denied 
appellant all compensation for acting as attorney for a 
receiver on the basis of the following reasoning: 

L That appellant was not permitted to represent at 
the same time a receiver and several general creditors of 
the corporate debtor, where one of such creditors has its 
claim guaranteed by the principals of such debtor in that 
dual representation under such circumstances involves a 
conflict of interest which is not permitted by the Bank- 
ruptcy Act. 

2. That General Order 44 required appellant to set 
forth in his affidavit which accompanied the applica- 
tion for his employment, the specific facts that one of 
the general creditors he represented (Amstan) held the 
personal guarantee of its claim by the principals of the 
corporate debtor, and that appellant intended to sue and 



—13— 

attach certain real property standing solely in the name 
of such principals. The Referee and the Count con- 
clude that this information is required as a matter of 
law to be set forth in that appellant was required to 
anticipate that the principals of the corporate debtor 
may have been diverting corporate assets to themselves, 
even though no such facts were then known which would 
substantiate this conclusion, nor were such facts ever 
proved, 

3. That by failing to set forth such information in 
his affidavit, appellant took the chance that in the event 
it later appeared that the receiver had a cause of action 
against such principals, this fact would indicate that 
there had existed all along an actual, even though un- 
known, conflict in appellant's representation of the re- 
ceiver which conflict would require the court under 
General Order 44 to deny all fees to which he otherwise 
might be entitled. 

In reply to this position, appellant's argument may 
be stated as follows : 

1. That Section 44(c) of the Bankruptcy Act ex- 
pressly does not disqualify an attorney from represent- 
ing at the same time a receiver and several general 
creditors of the corporate debtor, even though one of 
such creditors has its claim guaranteed by the prin- 
cipals of such debtor. 

2. That General Order 44 requires an application for 
the employment of counsel to set forth to the best of 
petitioners' knowledge, such facts as might reasonably 
give rise to a conflict in representation. 

3. That the affidavit filed by appellant in connection 
with the application for his employment contains all 
facts known to appellant at that time which might 
reasonably give rise to a conflict in representation, 
and therefore complied with General Order 44. 



—14— 

4. That following appellant's undertaking of repre- 
sentation of the receiver, a report by an accountant 
indicated the possibility that the receiver might have 
claims against the principals of the corporate debtor. 
That immediately upon learning of this possiblity appel- 
lant withdrew from representing the receiver in regard 
to his potential claim against such principals, and spe- 
cial counsel was appointed by the court to continue to 
investigate the relationship between the corporate debtor 
and its principals, and if such investigation should so 
warrant, to file suit against such principals. That sub- 
sequent thereto special counsel contended that the re- 
ceiver had a cause of action against the principals and 
requested the court's permission to file an action against 
such principals and another corporate defendant on be- 
half of the receiver. The court granted this request, 
and, subsequent thereto, a settlement of the litigation 
was approved by the court which did not involve the 
payment by such principals of any part of the sum re- 
covered. 

In conclusion, appellant argues that the denial of all 
fees to him by the court is not justified by General 
Order 44 in that : 

1. Appellant did not represent an interest adverse to 
the receiver; 

2. Appellant's Affidavit filed in conjunction with 
the application for his employment compHed with the 
requirements of General Order 44 ; and 

3. To deny all fees to appellant under the circum- 
stances of this case for his representation of the receiver 
would constitute an abuse of any discretion the court 
may be given by General Order 44. 



—15— 
Questions Presented. 

1. Does the Bankruptcy Act prevent an attorney 
from representing at the same time a Receiver and 
several general creditors of the corporate debtor, one of 
whom has its claim guaranteed by the principal share- 
holders of such debtor? 

2. Does General Order 44 require that an applica- 
tion for an order authorizing a Receiver to employ an 
attorney on a general retainer set forth the specific 
facts that the proposed attorney represents, among 
general creditors, a general creditor 

(a) whose claim is guaranteed by the principals of 
the corporate debtor, and 

(b) that the proposed attorney contemplates suing 
and attaching property standing in the name of 
such principals on behalf of such general creditor, 

where no facts are then known which would indicate 
that the Receiver might have a cause of action against 
such principals? 

3. Does General Order 44 grant to the court the 
discretion to disallow all fees to an attorney 

(a) where without actual knowledge of a possible 
conflict, an attorney represents a Receiver for a 
corporate debtor and also a general creditor 
which has its claim guaranteed by the princi- 
pals of the debtor corporation, 

(b) where such attorney levies an attachment on 
real property on behalf of such general creditor 
on real property standing solely in the names of 
the principals of such corporate debtor, 

(c) where subsequent to undertaking such dual rep- 
resentation, and levy of attachment, a suspicion 
is raised that the corporate debtor may have a 
claim against such principals, 



—16— 

(d) where such attorney Immediately withdraws 
from advising the Receiver with regard to the 
possibility of establishing such claims and spe- 
cial counsel is promptly appointed to advise the 
Receiver in this regard, 

(e) where the real property upon which such attor- 
ney levied the attachment on behalf of the gen- 
eral creditor, becomes part of the corpus of a 
trust, and 

(f) where the court approves, with the acquiescence 
of such special counsel, the provisions of said 
trust, thereby permanently preventing the Re- 
ceiver from recovering for the estate, any of the 
trust corpus. 

4. Is it an abuse of discretion which may be given 
to the court in General Order 44 to deny all fees to an 
attorney who represents a Receiver under the circum- 
stances set forth in Question 3 above ? 



—17— 

ARGUMENT. 
I. 

Section 44(c) of the Bankruptcy Act Expressly Does 
Not Disqualify Appellant From Representing at 
the Same Time a Receiver and Several General 
Creditors of the Corporate Debtor, One of 
Whom Has Its Claim Guaranteed by the Princi- 
pal Shareholders of Such Debtor. 

(1) Subdivision (c) Was Added to Section 44 to Specifically 
Permit an Attorney to Represent Both the Receiver 
and a General Creditor Where Only the Possibility of 
a Conflict of Interest Exists. 

Section 44(c) of the Bankruptcy Act reads as fol- 
lows: 

"§44 Trustees; Creditor's Committees; and At- 
torneys. . . . 

"(c) An attorney shall not be disqualified to act 
as attorney for the receiver or trustee by reason 
of his representation of a general creditor." 

Subdivision (c) was added to Section 44 of the 
Bankruptcy Act in 1938 (June 22, 1938, c. 575 §1, 
52 Stat. 860), and in order to understand the reasons 
for the addition of this subdivision, it is necessary to 
undertake a brief review of the structure of the Bank- 
ruptcy Act itself and the relationship of the Act to 
the General Orders in Bankruptcy. 

Until its repeal in 1964, Section 30 of the Bank- 
ruptcy Act authorized the Supreme Court to make 
all necessary rules, forms and orders as to procedure 
necessary to carry out the provisions of the Act. Gen- 
erally speaking, the General Orders are not construed 
to add anything to the Act, but merely to aid in its 
execution. West Co. v. Lea Bros. & Co., 174 U.S. 590, 
19 S. Ct. 836, 43 L. Ed. 1098 (1899). 



—18— 

When it is necessary to construe a General Order, 
courts take into consideration the purpose to be ac- 
compHshed by the Act. Matter of L.M. Axle Co. 
(CCA. 6 Gr.), 5 A.M.B.R. (N.S.) 734, 3 F. 2d 581 
(1925) ; Matter of Hodges (D.C Conn.). 23 A.M.B.R. 
(N.S.) 266, 4 F. Supp. 804 (1933), aff'd (CCA., 2d 
Cir.) 25 A.M.B.R. (N.S.) 346. 70 F. 2d 243 (1934), 
and, similarly, where a General Order is amended, the 
previous Order should be studied with the amended 
Order to determine the purpose of the amendment. 
Matter of Hodges (D.C Conn.), 23 A.M.B.R. (N.S.) 
266, 4 F. Supp. 804 (1933), aff'd (CCA., 2d Cir.) 
25 A.M.B.R. (N.S.) 346, 70 F. 2d 243 (1934). 

Section 30 of the Bankruptcy Act was repealed by 
Public Law 88-623, 78 Stat. 1001 (1964), which be- 
came effective on October 3, 1964. In view of the fact 
that the Act itself describes in great detail the proce- 
dures to be followed in bankruptcy cases under Sec- 
tion 30, it was necessary for Congress to act upon 
many bills which were concerned with no more than 
procedural changes. In order to relieve Congress of 
this burden. Public Law 88-623 gave to the Supreme 
Court of the United States the same general rule — 
making authority in bankruptcy that it already had in 
civil procedure, admirality, criminal procedure prior to 
and including verdict, and review of decisions of the 
Tax Court. Collier Bankruptcy Manual, Matthew 
Bender & Co. 1965 at pages 395-395.1. 

Although Public Law 88-623 repealed Section 30 of 
the Bankruptcy Act, it specifically provided that its 
repeal did not operate to invalidate or repeal prior 
orders prescribed under the authority of that section 
by the Supreme Court. In summary, the purpose of 
the General Orders in Bankruptcy, which remain in ef- 
fect despite the 1964 amendment deleting Section 30, is 



—19— 

to aid in the execution of the Act as opposed to amend- 
ing the Act. 

With this background of the relationship of the Bank- 
ruptcy Act to the General Orders in Bankruptcy, the 
reasons which prompted Congress to add Subdivision 
(c) to Section 44 are more easily understood. 

Prior to 1938, some District Courts [New York and 
elsewhere, although not the Ninth Circuit; see In re 
Rury (CCA. 9th (1924), 5 A.B.R. (N.S.) 295, 2 R 
2d 330) ] had held that no attorney representing a 
creditor could also act as an attorney for the receiver 
or trustee. Analysis of H.R. 1289, 74th Cong. 2d Sess. 
(1936), at page 157. 

The reason for this rule is stated by the court In 
Matter of Carlisle Packing Co. (D.C Wash.), 12 F. 
Supp. 8 (1935), and is typical of one branch of judi- 
cial thought on this subject at that time. In Carlisle, 
the court held that a creditor's attorney was in- 
competent to act at the same time as counsel for the 
trustee. This determination was based upon former 
General Order 44 (as amended in 1933), and the rela- 
tion of this General Order to General Order 21(6). 
General Order 44 stated that an attorney for the trustee 
could not at the same time represent any interest ad- 
verse "to any creditors." As there was the possibility 
under General Order 21(6) that the trustee would be 
required to re-examine a creditor's claim, the court felt 
that an adverse interest would exist in undertaking such 
dual representation, as an attorney could not represent 
a trustee who might have the obligation to re-examine 
the claim of a creditor who was represented by the 
trustee's attorney. 

In summary, New York and several other courts 
felt that an attorney could not represent a general 



—20— 

creditor and also the receiver or trustee because the Gen- 
eral Orders imposed certain duties on these court-ap- 
pointed officers, the performance of which could give 
rise to a conflict of interest. 

In 1938, Subdivision (c) was added to Section 44 of 
the Bankruptcy Act. with the stated purpose of abrogat- 
ing the "New York" rule. The reason for this addi- 
tion, notwithstanding the continued possibility that a 
conflict of interest might arise, was explained in the 
House Report which accompanied the enactment of this 
particular provision as follows : 

"A rule exists in some district courts (New York 
and elsewhere) that no attorney for a creditor shall 
act as attorney for the receiver or trustee. Such 
rules are fundamentally unsound. There is no rea- 
son why an attorney for a general creditor cannot 
act as attorney for the receiver or trustee because 
the creditor can act as receiver or trustee {In re 
Mayflower Hat Co., 23 A.B.R. (N.S.) 366, 65 
F.2d 330) and if this can be done then his at- 
torney should be allowed to represent him. A gen- 
eral creditor does not hold any adverse interest 
which would disqualify his attorney (In re Rury 
(CCA. 9th (1924), 5 A.B.R. (N.S.) 295, 2 R 
2d 330). 

"If creditors are to be allowed to select the trustee, 
then such trustee should be free to choose as his 
attorney, any attorney of the creditors. The only 
qualification in each case should be that the person 
selected is not connected with an adverse interest. 
The fact that the attorney selected is the attorney 
for a creditor of the estate does not necessarily 
mean that he is connected with an adverse in- 
terest. Creditors have an adverse interest only 
when they seek to have allotted to them more than a 



—21— 

pro rata share of the estate, or to retain some ad- 
vantage over the other creditors which they secured 
prior to bankruptcy. . . . 

"The disquaHfication should come as it now does 
against those creditors or their attorneys of any 
classification who represent one of the special 
classes of creditors, to wit, secured, preferred, or 
prior (which claim some priority in distribution), 
or who represent an adverse interest." (Analysis 
of H.R. 1289, 74th Cong., 2nd Sess. (1936), at 
Pages 157-8.) 

Following the addition of Subdivision (c) to Sec- 
tion 44, the phrase "any creditor" (the phrase relied 
upon by the court in Carlisle) was deleted from General 
Order 44. 

In conclusion, Congress determined that despite the 
possibility that a conflict in representation might exist, 
as it does in any situation where dual representation is 
permitted, the possibility of such a conflict was more 
than outweighed by the economies which would result 
by permitting an attorney to represent a receiver or 
trustee and also one or more general creditors. In con- 
sidering this policy determination, the court in Cal- 
Neva Lodge, Inc., C.C.H. Reports, Para. 62,347 
(1967), [Entire Case Attached as Appendix A], re- 
cently stated: 

"The policy considerations which led Congress 
(11 U.S.C. 73(c)) to permit the attorney for a 
general creditor to represent a receiver or trustee 
(or debtor in possession) are not subject to review 
by this court. Like an entrapment which may be 
lawful or unlawful, this is a conflict of interest 
which is lawful rather than unlawful." {Id. at pp. 
5-6.) 



—22— 

(2) The Fact That One of the General Creditors Rep- 
resented by Appellant Held a Personal Guarantee of 
Its Claim Executed by the Principal Shareholders of 
the Corporate Debtor, Does Not Disqualify Appellant 
From Representing the Receiver. 

Initially it should be pointed out that the fact that 
a creditor of a bankrupt also holds a guarantee from a 
third party, does not alter its status as an unsecured 
creditor under the Bankruptcy Act. As the court 
stated in Doehler Die Casting Co. v. Holmes, 52 N.Y.S. 
2d 321 (1944), at pages 322-323: 

"Only one other defense is worthy of mention. It 
is claimed that plaintiff, by filing a proof of un- 
secured debt in the bankruptcy proceedings, waived 
any claim he might have had against the defend- 
ant. However, a guarantee of a debt of a bank- 
rupt does not make the debt a secured one within 
the meaning of Section 1(28) of the Bankruptcy 
Act, 11 U.S.C.A. §1(28). The security in such 
a case must be 'upon the property of the bank- 
ruptcy.' " (Emphasis added.) 

The last sentence of the above quotation raises a 
significant problem. Had the evidence shown that ap- 
pellant actually knew at the time he prepared his af- 
fidavit, or even at the time that the order authorizing 
his employment was approved by the court, that the re- 
ceiver had a cause of action to recover on behalf of 
the corporate debtor, assets which were in the pos- 
session of the guarantors, that fact would disqualify 
appellant from acting as attorney for both the receiver 
and such guaranteed creditor. The Findings of Fact 
made by the court do not, however, find that appellant 



—23— 

had such knowledge. Specifically, Finding of Fact 21 

states as follows : 

"That on or before June 6. 1963, the date of entry 
of the order authorizing his employment as attor- 
ney for the receiver, Grodberg actually knew, or 
should have known, that his representation of the 
receiver was then, or would be, or at least might 
become, in substantial conflict with his representa- 
tion of Amstan." (Emphasis added.) 

This same kind of finding is made by the court in 
Finding of Fact 20, where the court states: 

"That on May 31, at which time Grodberg pre- 
pared his affidavit and the application and order 
authorizing his employment as attorney for the 
receiver herein, there was, in fact, an actual, if not 
yet known, conflict of interest as between the re- 
ceiver on one hand, and Amstan, on the other 
hand." (Emphasis added.) 

There is no finding of fact that appellant actually 
knew, either at the time the application, affidavit and 
order was prepared on May 31, 1963, or at the time 
the order authorizing his employment was entered on 
June 6, 1963, that the receiver might have some claim 
against the Manildis. In essence, the court finds that 
the mere existence of a guarantee of a general creditor's 
claim by the principal shareholders of the corporate 
debtor indicates the possibility of a conflict, since there 
is always the possibility that principals may have been 
diverting the assets of a corporate debtor, and the 
possibility of such a conflict disqualifies an attorney 
from undertaking dual representation. 

However, it is clear that the possibility of a conflict 
of interest, as found by the court in Carlisle, does not, 
as the result of the addition of Subdivision (c) to 
Section 44 of the Bankruptcy Act in 1938, and the sub- 



sequent amendment of General Order 44, prevent an 
attorney from undertaking such dual representation. As 
the result of this amendment, and the deletion of the 
term "any creditor" from General Order 44, the pos- 
sibility that principals of a corporate debtor may have 
been diverting assets of the debtor to themselves, is, 
in itself, insufficient to prevent an attorney from 
undertaking such dual representation. 

This conclusion is supported both by the analysis of 
Congressional intent set forth above, and by the most 
recent judicial interpretation of Section 44(c) contained 
In the Matter of Cal-Neva Lodge, Inc. In this case the 
United States had obtained a judgment for delinquent 
taxes against Sanford D. Adler (Adler), a creditor who 
had subordinated his claims against the debtor corpora- 
tion of which he was the principal stockholder. Fol- 
lowing the payment of all claims of creditors, a fund 
remained subject to the control of the court which 
was available for defraying the expenses of administra- 
tion, with the balance of said fund to be paid to Adler. 
The claimants to the funds remaining were the attor- 
neys for the estate and, derivatively, the United States 
by virtue of Adler's interest in the residue. 

The court stated the question before it as follows: 
"The only substantial question of law presented by 
the Petition for review is that Aaron Levinson, 
now deceased, one of the court-appointed attorneys 
for the debtor in possession, should be allowed no 
compensation for his services because of the failure 
of the initial petition for appointment of attorneys 
to disclose adverse interests, in violation of Gen- 
eral Order 44. The petition of debtor corporation 
for the employment of counsel alleges, in part : 
'That your petitioner proposes, upon the granting 
of this petition to [retain] LESLIE E. RIG- 
GINS, of Reno, Nevada, the firm of QUITT- 



—25— 

NER AND STUTMAN, of Los Angeles, Cali- 
fornia, and AARON LEVINSON of Beverly 
Hills California, as counsel, who have agreed to 
accept such amount as may be fixed by this Court 
as compensation for any services rendered to your 
petitioner, which attorneys and firm of attorneys 
is now the attorney for the Debtor and whose in- 
terest is not adverse to that of the Debtor in pos- 
session or to the administration of this es- 
tate.' 

"The objectors complain that Levinson was then 
the personal attorney of Sanford D. Adler, the 
principal stockholder and a large creditor of debt- 
or corporation, and the personal attorney of several 
other creditors of debtor corporation whose claims 
aggregating in excess of $650,000 were subsequent- 
ly filed in the proceeding by Levinson. 
"We conceive no adverse interest between a princi- 
pal stockholder of a corporation and a corporate 
debtor in possession in a Chapter XI proceeding. 
With respect to corporate creditors, on the face of 
things their rights are adverse to the debtor in 
possession, and if it were not for a specific provi- 
sion of the Bankruptcy Act, this Court woidd seri- 
ously consider disallowing Levifison's fee because 
the petition failed to disclose Levinson's connec- 
tion with the creditors he represented. Proper prac- 
tice requires such disclosure in any event under 
General Order 44. But Congress has seen fit ex- 
pressly to declare than an attorney shall not be dis- 
qualified to act as attorney for a receiver or trus- 
tee merely by reason of his representation of a gen- 
eral creditor [11 U.S.C. 72(c)], and a debtor in 
possession is in substantially the same position as a 
trustee [11 U.S.C 742]." {Id. at pages 4-5). (Em- 
phasis added). 



—26— 

In summary, the possibility of a conflict of interest 
did not prevent Levinson from undertaking such dual 
representation because of a specific provision of the 
Bankruptcy Act, and the order allowing his fees was af- 
firmed by the court. 

(3) Neither In re Woodruff, 121 F. 2d 152 (1941), nor 
Woods V. City National Bank & Trust Co. of Chicago, 
312 U.S. 262 (1940), Supports the Proposition That 
the "Mere Possibility" of a Conflict of Interest Pre- 
vents an Attorney From Representing Both the Re- 
ceiver and a General Creditor. 

The Referee and the District Court take the position 
in Findings of Fact 20 and 21, and in Conclusions of 
Law 1 and 2, that the possibility of a conflict of inter- 
est, i.e., the possibility that the Manildis (principals 
of the corporate debtor and guarantors of the claims of 
general creditors) were fraudulently diverting to them- 
selves the assets of the corporate debtor, per se, pre- 
vents an attorney from representing the receiver and a 
general creditor with the Manildis' guarantee. 

In support of this position the court relies on In re 
Woodruff, CCA. 9th (1941), 121 F. 2d 152, and 
Woods V. City National Bank & Trust Co. of Chicago, 
312 U.S. 262 (1940), neither of which stand for the 
proposition for which they are asserted. 

In Woodruff the receiver's attorneys, Turnbull & 
Meyberg, were appointed upon a verified petition of 
the receiver, which, though not signed by Turnbull and 
Meyberg, was prepared by them. At the time of such 
appointment and at all times pertinent to the action, 
Turnbull & Meyberg were also attorneys for a substan- 
tial general creditor whose claim was, at that time, dis- 
puted by the trustee, and this fact was known to them. 
In conjunction with the verified petition of the receiver 
for their employment, Turnbull & Meyberg filed affi- 



—27— 

davits with the court, each stating that he was "not 
employed by or connected with the bankrupt or any 
other person having any interest adverse to the receiver, 
trustee, or creditor." The fact that Turnbull & Mey- 
berg were attorneys for a substantial general creditor 
whose claim was then in dispute was not disclosed. 

The court found that the receiver's petition, and the 
affidavits filed in connection therewith, did not comply 
with the requirements of General Order 44. However, 
the majority of the court did not find that Turnbull 
& Meyberg had represented an interest adverse to the 
receiver in any matter upon which they were employed 
for such receiver, which is the finding required by Gen- 
eral Order 44. Instead, the majority of the court 
determined that Turnbull & Meyberg were not entitled 
to compensation in that the application for their em- 
ployment did not disclose the necessity for employing 
counsel, and an examination of the record indicated 
to the court that there was in fact no such necessity. 
As the court stated at page 155 : 

"The receiver's petition — written, filed and pre- 
sented to the court by Turnbull & Meyberg — did 
not in terms state that it was necessary for the re- 
ceiver to employ attorneys. It did, however, state 
that the receiver 'must have legal advice concern- 
ing his conduct.' This and other statements in the 
petition obviously were designed and intended to 
make it appear that it was necessary for the re- 
ceiver to employ attorneys. The record discloses 
no such necessity." 

Dissenting in part. Justice Healy stated : 

"Where the trial court has authorized its receiver 
to employ counsel, I think an appellate court would 
rarely be justified in rejecting entirely the allow- 



—28— 

ance of compensation because of its belief, after 
the fact, that an attorney was not necessary. I 
do not believe that there is justification for that 
course here." 

In conclusion, Woodruff does not stand for the prop- 
osition that the possibility of a conflict of interest, 
or, in the words of the court, "an actual, if not yet 
known, conflict of interest" disqualifies an attorney 
from representing at the same time both a receiver 
and several general creditors, one of whom has its claim 
guaranteed by the principals of a corporate debtor. 
Woodruff does stand for the proposition that where 
there is no actual necessity for the receiver to employ 
counsel, an appellate court may make such determina- 
tion and deny counsel any compensation which may 
have been allowed in error. To whatever extent the 
holding in Woodruff may be applicable to the case at 
bar, it should be pointed out that by holding that the 
reasonable value of the services performed by appellant 
was the sum of $12,500.00 [Finding of Fact 19], the 
court also finds by implication that the receiver ac- 
tually required the services of counsel. 

In Woods V. City National Bank, the Supreme Court 
considered the question of whether attorneys who rep- 
resented an indenture trustee and also bondholders, 
could be compensated from the estate. The property 
involved was an apartment hotel. A committee was 
formed to represent the first mortgage bonds in the 
reorganization. Counsel to the bondholders' committee 
had also acted as general counsel for one of the two 
principal underwriters during the financing of the prop- 



—29— 

erty involved, and that underwriter's prospectus was 
under attack as containing certain misrepresentations. 

The court pointed out that the bondholders' commit- 
tee which counsel represented was "in substance a 
part of the indenture trustee's reorganization divi- 
sion." That committee was composed of five members, 
two of whom were officers or employees of one of the 
principal underwriters of the bonds, which underwriter 
was, in addition, heavily interested in the equity. Two 
members were officers of the indenture trustee. Two 
members were also members of bondholders' commit- 
tees for neighboring apartment properties and domi- 
nated the committees representing the bonds of those 
other companies. There was more, but it is plain the 
evidence of the relationship between the trustee and 
the committee made up of members with sharply di- 
vided loyalties was ample to support the finding of fact 
of the District Court, which the Supreme Court ex- 
pressly referred to, that counsel for the trustee and the 
committee represented conflicting interests. 

In conclusion, it was an actual conflict of interest 
which resulted in the denial of compensation in Woods, 
not the possibility of one which might arise as the re- 
sult of the dual representation undertaken. 

In re Philadelphia & IV. Ry. Co., 73 F. Supp., 169 
(1947), the scope of the Supreme Court's decision in 
Woods was considered in detail as follows : 

'The more difficult question is whether the fact 
that the firm represented both the indenture trus- 
tee and a group of bondholders makes it necessary 
to disallow the claim, and the answer depends en- 
tirely upon the scope of the decision of the Su- 
preme Court in Woods v. City National Bank, 
312 U.S. 262, 61 S. Ct. 493, 496, 85 L.Ed. 820. 



—30— 

The Commission argues that that decision lays 
down the rule that an attorney who represents an 
indenture trustee at the same time that he is 
representing bondholders may not under any cir- 
cumstances be allowed compensation from the es- 
tate. I do not think that it goes so far as that, 
"There are certain situations in which conflict 
of interest is always present, of necessity, arising 
from the nature of the interests themselves. Deb- 
tor and creditor, stockholder and bondholder or 
underwriter are illustrations of these. In such re- 
lationships actual conflict is conclusively presumed 
and the mere fact that counsel represents both 
sides is enough to forfeit his right to compensa- 
tion. 

"In other cases, while conflict may arise, there is 
no conclusive presumption that the interests are 
hostile and whether or not a lawyer represents 
more than one party must be denied compensa- 
tion depends upon the existence, as a matter of 
fact, of a conflict in each particular case. The 
mere possibility is not sufficient. As a matter of 
fact the possibility of conflict exists in almost 
every case of multiple representation. Thus, where 
an attorney represents a large number of indi- 
vidual bondholders there is always a possibility 
that a minority will find that their interests lie 
in one direction and the majority in another. When 
this situation arises the attorney may not con- 
tinue to represent all but until it does it has never 
been suggested that his representation of the group 
is improper. Plainly, representing an indenture 
trustee and a group of bondholders is in this lat- 
ter class. An indenture trustee, of course, 
must act for what it conceives to be the benefit 



—31— 

of all the bondholders. There may be no division 
of opinion among them. So long as that is so, 
there is no actual conflict between its duties to- 
ward those whom it represents and its duties to- 
ward the bondholders as a whole. If diversity of 
aims arises between groups of bondholders, there 
is, of course, no question that the dual represen- 
tation becomes improper." {Id. at p. 172.) (Em- 
phasis added.) 

In conclusion, neither Woods nor Woodruff stands 
for the proposition for which they are asserted. Woods, 
as interpreted by the court in In re Philadelphia & W. 
Ry. Co., simply states that in certain situations a con- 
flict of interest is always present, of necessity, because 
of the nature of the interests themselves. In the case 
at bar, the nature of .the interests themselves do not 
automatically result in a confHct of interest unless the 
court presumes a fraud, i.e., that the Manildis were 
diverting assets of the corporate debtor to themselves 
without the payment of adequate consideration. With- 
out such a presumption, the nature of the interests 
themselves do not, by necessity, give rise to any con- 
fHct. 

The purpose of the addition by Congress in 1938 of 
Subdivision (c) to Section 44 of the Bankruptcy Act 
was to eliminate as a bar to dual representation, "pre- 
sumed frauds" and "possibilities of conflicts of inter- 
est." The holding in the case at bar by the referee 
and the District Court ignores this legislative deter- 
mination, and attempts to reinstate by the use of the 
language "actual, if not yet known, conflicts of in- 
terest" that branch of judicial thought which was evi- 
denced by the court's decision in Carlisle. Neither 
Woodruff, nor Woods, sanctions such a "rebirth", and 
Congress has expressly forbidden it. 



—32— 

II. 

The Affidavit Filed by Appellant in Conjunction 
With the Application for His Employment as 
Counsel for the Receiver Contained All Facts 
Then Knov^n to Appellant Which Might Rea- 
sonably Give Rise to a Conflict of Interest and 
Therefore Complied With the Requirements of 
General Order 44. 

At the time appellant prepared his affidavit which 
was filed in conjunction with the application for his 
employment as attorney for the receiver, General Or- 
der 44, read in pertinent part, as follows : 

"No attorney for a receiver, trustee, or debtor in 
possession, shall be appointed except upon the or- 
der of the court, which shall be granted only upon 
the verified petition of the receiver, trustee, or 
debtor in possession, stating the name of the coun- 
sel whom he wishes to employ, the reason for his 
selection, the professional services he is to render, 
the necessity for employing counsel at all, and to 
the best of petitioner's knowledge all of the at- 
torney's connection with the bankrupt or the debt- 
or, the creditors or any other party in interest, 
and their respective attorneys . . ." (Emphasis 
added.) 

While there was no specific requirement, at the time 
the receiver filed his application for the employment 
of appellant as his attorney, that appellant file an af- 
fidavit in conjunction with the receiver's application, 
the practice is apparently followed by most attorneys, 
even though the same is a holdover from prior rules 
existing in this area. 

The application, order, and affidavit were prepared 
by appellant on May 31, 1963, and sent on said date 
to the receiver for his signature and filing with the 



—33— 

court. The affidavit which was prepared and signed by 
appellant recites, among other things, the following: 

". . . ; that affiant represents certain unsecured 
creditors whose interests, so far as known to af- 
fiant, are identical to those of the receiver here- 
in; that affiant does not represent any interest 
which is adverse to the receiver or to the cred- 
itors herein. . . ." [Finding of Fact 6.] (Em- 
phasis added.) 

The order of employment, which was approved by 
the court on June 6, 1963, recites that appellant was 
employed for the following reasons or purposes, among 
others : 

"E. To examine witnesses under the provisions 
of Section 21-A (sic) of the Bankruptcy Act as 
the same may be found necessary or appropriate to 
ascertain facts and to determine if legal action 
should be taken to preserve assets of this estate 
including by way of specification and not by way 
of limitation the relationships between the above- 
entitled debtor and subsidiary or connected cor- 
porations with specific reference to business trans- 
actions between them. 

"F. To advise and assist applicant in the collec- 
tion of accounts receivable and all other money, 
funds and property due and owing to the debtor 
as the same may be found necessary. 

"G. To prepare on behalf of applicant necessary 
legal applications, answers, orders, reports and 
other papers. 

"H. To confer with the receiver rendering legal 
advice, and in general to render such other legal 
services as are usually rendered by attorneys for 
receivers in like proceedings." 



—34— 

Subsequent to appellant's mailing to the receiver the 
Application for Employment of Counsel, Affidavit and 
Order, appellant received on June 4, 1963, a telephone 
call from the attorney in Chicago who had referred 
this matter to appellant. Said attorney advised appel- 
lant that one of the general creditors (Amstan), who 
was represented by appellant, held the personal guar- 
antee of its claim by Mr. and perhaps Mrs. Manildi, 
who were principals of the corporate debtor, Haldeman 
Pipe & Supply Co. [Finding of Fact 8.] Said attor- 
ney requested that appellant file an action on said 
guarantee at the earliest possible moment, and attach 
certain real property owned by the INIanildis in that 
he had been informed that other creditors of the cor- 
porate debtor also had guarantees, and were proceed- 
ing to levy and attach. [Finding of Fact 8.] 

Following said telephone conversation, appellant no- 
tified the receiver, following a meeting at the Bank 
of America, that he had been informed that one of 
the creditors he represented held a personal guarantee 
executed by one or perhaps both of the Manildis. [Find- 
ing of Fact 11.] 

Shortly thereafter, and on June 6, 1963, the re- 
ceiver filed said Application, the Affidavit, and Order, 
and the same was approved by the court on the same 
date. 

The question remains, whether under the circum- 
stances set forth above, appellant was required by Gen- 
eral Order 44 to set forth either in the application for 
his employment, or in his affidavit, the fact that one 
of the general creditors he represented held a personal 
guarantee of its claim executed by one or more of the 
principals of the debtor corporation. The language of 
General Order 44 relative to this question reads in 
pertinent part as follows : 

". . ., and to the best of petitioner's knowledge 
all of the attorney's connection with the bankrupt 



—35— 

or the debtor, the creditors or any other party in 
interest, and their respective attorneys . . .". (Em- 
phasis added.) 

The words itaHcized in the above quotation con- 
stitute an express limitation on the information which 
must be disclosed. Whether the petition actually be 
prepared by the receiver, or by the attorney acting as 
agent for the receiver. General Order 44 only requires 
that the attorney's connections with the bankrupt, debt- 
or, creditors, or any other party in interest, be set 
forth to the best of either of their knowledge. 

Similarly, because of the all-encompassing aspect of 
the disclosure requirement, it appears reasonable to as- 
sume that there is also an implied Hmitation on the 
information which must be disclosed. Simply stated, 
this limitation is to the effect that facts having no 
apparent relevancy to the matter in question are not 
required by General Order 44 to be set forth either in 
the application for employment of counsel or in, as in 
this case, an affidavit filed in conjunction with such 
application. 

Admittedly, the question of what facts are "relevant" 
is one about which reasonable men can differ. This is 
especially true where the court has the ability to take 
advantage of "20-20 hindsight" in reaching its de- 
termination. However, it is clear from the evidence 
presented, that under the circumstances of this case, 
appellant could not, at the time he prepared the ap- 
plication for employment of counsel and his affidavit, 
be reasonably expected to anticipate that the receiver 
would assert a cause of action against the Manildis 
at some future date. After the appellant had prepared 
and sent these documents to the receiver for his exe- 
cution of the application, appellant, for the first time, 
became aware that one of the creditors he represented 



—ad- 
held a personal guarantee of its claim executed by 
the Manildis. It is submitted that appellant's knowl- 
edge of such guarantee should not have immediately 
suggested to him the necessity of amending his af- 
fidavit. 

Appellant's initial contact with this case prior to 
June 4, 1963, came in a phone call on May 28, 1963, 
when he was first informed by the Chicago attorney 
that he would like appellant to represent certain of 
his clients. This telephone conversation was followed 
by one to counsel for the debtor, and a subsequent 
meeting with the referee to whom the matter had been 
assigned on May 31, 1963. The corporate debtor had 
been in existence for a considerable period of time 
and had substantial lines of credit w4th many major 
suppliers throughout the United States. An example of 
this fact is Amstan, which had an account receivable in 
excess of $100,000.00. 

On June 4, 1963, when appellant first became aware 
of the existence of the guarantee, he informed the re- 
ceiver of that fact and there is no indication that the 
receiver felt any amendment to appellant's affidavit was 
necessary at that time. It is submitted that these facts 
should not have indicated to appellant the necessity of 
including the existence of the guarantee in either the 
application for his employment, or appellant's affi- 
davit. Appellant did set forth the fact that he rep- 
resented certain unsecured creditors whose interests, so 
far as known to appellant, were identical to those of 
the receiver. 

Under the circumstances of this case, appellant in- 
cluded within his affidavit all facts then known to 
him which might reasonably give rise to a conflict in 
representation, and in doing so, complied with the re- 
quirement of General Order 44. 



—37— 

III. 
Appellant's Representation of Amstan Did Not in 
Fact Conflict With His Representation of the 
Receiver, and Therefore the Court Does Not 
Have the Discretion Under General Order 44 to 
Deny Appellant the Reasonable Value of His 
Services. 

(1) Itemlab, Inc., 257 F. Supp. 765 (1966), and Cal-Neva 
Lodge, Inc. Both Require That There Be an Actual 
Conflict of Interest, Not the Possibility of One, Before 
the Court Has the Discretion to Deny Fees Under Gen- 
eral Order 44. 

In Parts I and II of Appellant's Argument it has 
been shown that the ''mere possibility" of a conflict 
of interest which might arise when an attorney rep- 
resents both the receiver and a general creditor with a 
guarantee of his claim by a third party, does not pre- 
vent an attorney from undertaking such dual rep- 
resentation. Furthermore, it is submitted that appel- 
lant's affidavit filed in conjunction with the applica- 
tion for an order authorizing appellant's employment 
as attorney for the receiver contained all facts which 
appellant could reasonably be required to disclose, and 
therefore complied with the applicable requirements of 
General Order 44. 

The third sentence of General Order 44 sets forth 
the circumstances in which a court may deny compen- 
sation to an attorney who has represented a receiver, 
and reads as follows : 

"If without disclosure any attorney acting for a 
receiver or trustee or debtor in possession shall 
have represented any interest adverse to the re- 
ceiver, trustee, creditors or stockholders in any 
matter upon which he is employed for such re- 
ceiver, trustee, or debtor in possession, the court 



—38— 

may deny the allowance of any fee to such attor- 
ney, or the reimbursement of his expenses, or 
both, and may also deny any allowance to the re- 
ceiver or trustee if it shall appear that he failed 
to take diligent inquiry into the connections of said 
attorney." (Emphasis added.) 

In summary. General Order 44 requires that before 
the court acquires the discretion to deny appellant the 
reasonable value of his services, it must first find that : 

(a) Appellant did not make the disclosure required 
by General Order 44, and 

(b) Appellant represented an interest adverse to the 
receiver in a matter upon which he was em- 
ployed for such receiver. 

Appellant has stated in Part II of this Argument, 
the reasons why his affidavit complied with the dis- 
closure requirements of General Order 44. It is sub- 
mitted, therefore, that the requirement of Subpara- 
graph (a) above has not been met. 

With regard to Subparagraph (b), judicial interpre- 
tation of this provision uniformly requires the court to 
find, as a fact, that appellant represented an interest 
adverse to the receiver, in a matter upon which he was 
employed for such receiver. 

For example, In the Matter of Itemlah, Inc., 257 
F. Supp. 765 (1966), a referee denied compensation to 
a law firm for services rendered by it as Special Coun- 
sel for the Trustee in Bankruptcy. It appears that on 
July 27. 1961, the debtor. Itemlab, Inc. (Itemlab) was 
adjudicated a bankrupt, and on August 25. 1961. the 
law firm of McLanahan. ]\Ierritt & Ingraham (]\IcLana- 
han) filed a proof of claim in the amount of $52.- 
600.60 on behalf of Dutch-American Mercantile Cor- 
poration (Dutch). Dutch also asserted a lien against 



—39— 

the assets of the estate by virtue of a chattel mort- 
gage given to Dutch's predecessor in interest, Blanmill 
Realty Corp. (Blanmill). 

At a time when the Blanmill chattel mortgage ap- 
peared satisfied of record — but actually was not — the 
bankrupt had executed a second chattel mortgage in 
favor of Eighteenth Avenue Land Co. (18th Avenue). 

Thereafter the Trustee in Bankruptcy petitioned the 
referee for appointment of McLanahan as special coun- 
sel to the trustee for the purpose of representing him 
in connection with all proceedings designed to set aside 
the 18th Avenue mortgage. A member of the iMcLana- 
han firm filed an affidavit which accompanied said 
petition, to the effect that said firm "did not repre- 
sent any interest adverse to the trustee nor had any 
relationship with the bankrupt except that 'we rep- 
resent Dutch-American Alercantile Corporation, who is 
a creditor of the * * * bankrupt'." {Id. at p. 765.) 
The affidavit made no mention of the fact that Dutch 
asserted a lien against the assets of the estate by virtue 
of the Blanmill chattel mortgage, and was therefore 
asserting a position as a secured creditor. 

On October 20, 1961, the Referee appointed Mc- 
Lanahan as special counsel, and pursuant to this ap- 
pointment his firm proceeded to attack the validity of 
the 18th Avenue mortgage. It was clear that if the 
18th Avenue mortgage had been upheld, it would have 
consumed practically all of the assets of the bankrupt 
estate. 

The 18th Avenue mortgage was successfully set 
aside, and McLanahan, representing Dutch, instituted 
a proceeding to direct the Trustee to pay to Dutch the 
sum of $42,760.00, with interest, as a lien creditor. 
However, after several proceedings, Dutch's claim as 
a secured creditor was ultimatelv denied. 



McLanahan, having completed the task of invaHdat- 
ing the 18th Avenue mortgage, applied on January 4, 
1965, for compensation and reimbursement for rep- 
resenting the. trustee. To this application the trustee 
responded by a motion for an order disallowing the 
compensation upon the ground that McLanahan had 
failed to disclose "an interest adverse to the trustee." 

After hearing, the referee granted the trustee's mo- 
tion. In reversing this determination, the court stated 
as follows : 

"The result in this case depends to a great ex- 
tent upon the interpretation and application of the 
present General Order 44 which is a question of 
law to which the 'clearly erroneous' standard does 
not apply. (Citing cases.) It also depends on de- 
termination of what constitutes an adverse inter- 
est and, if present, whether or not there was dis- 
closure of such interest. General Order 44 relat- 
ing to the appointment of attorneys for trustees 
sets forth conditions under which attorneys may 
be appointed and provides, among other things, 
that 'If without disclosure any attorney acting 
for a * * * trustee * * * shall have represented 
any interest adverse to the trustee * * * in any 
matter upon which he is employed for such * * * 
trustee, the court may deny the allowance of any 
fee to such attorney'." (Emphasis the court's.) 
(Mat p. 766.) 

In further defining the interpretive formula set 
forth somewhat generally hereinabove, the court stated 
that the primary question involved was as follows: 
"The first and foremost question to be decided is 
whether McLanahan represented an interest ad- 
verse to the trustee when it zvas employed by the 
trustee to set aside the 18th Avenue mortgage. 



1— 

An examination of the wording of General Order 
44 discloses that it refers to an interest which is 
adverse in the matter upon which the attorney is 
employed by the trustee. * * * From the very 
nature of the proceeding, their interests were nec- 
essarily identical. If they were to be successful in 
recovering any of the assets for the estate, they 
were compelled to unite in the task of removing 
this barrier. It is difficult to understand how it 
can be said that the interests of these two par- 
ties were adverse in this particular proceeding 
which is the only proceeding where General Or- 
der 44 is applicable in this case . . . The fact that 
Dutch claimed a preferred lien and therefore an 
interest adverse to the trustee in the assets after 
the mortgage was removed did not make its in- 
terest adverse to the trustee before the mortgage 
was removed. Community of interest should not be 
confused with a conflict of interest. Thus it was 
unnecessary to decide whether McLanahan made 
sufficient disclosure with respect to Dutch's claim 
to a preferred status to the Blanmill route after 
the invalidation of the mortgage." (Emphasis 
the court's.) (Id. at pp. 766-767.) 

This kind of factual approach is also found In the 
Matter of Cal-Neva Lodge, Inc., where the court states 
at pages 4-5 : 

''Although the petition was deficient in failing to 
disclose 'all of the attorney's connections with the 
bankrupt or debtor, the creditors or other parties 
in interest' (General Order 44), a disallowance 
of fees should follow only 'if without disclosure 
any attorney acting for * * * the debtor in pos- 
session shall have represented any interest adverse 
to the creditors or stockholders in any matter 
upon which he is employed for such * * * debtor 



in possession.' It is conceded by all that Levinson 
[one of the attorneys for the debtor in posses- 
sion] did not in fact represent an interest adverse 
to the debtor in possession . . . 

"If Mr. Levinson did represent Sanford D. Adler, 
he rendered a service to all other creditors of the 
debtor in possession by advising him to subordi- 
nate his claim to the claims of others. The record 
we have seen discloses no instance in which Lev- 
inson in fact acted adversely to the creditors of 
the corporation or to the debtor in possession." 

In order to determine whether appellant represented 
an interest adverse to the receiver in any matter upon 
which he was employed for such receiver, it is neces- 
sary to examine the record to ascertain exactly what 
happened. 

(2) Appellant Did Not Without Disclosure Represent an 
Interest Adverse to the Receiver in a Matter Upon 
Which He Was Employed for Such Receiver, in That 
When the Possibility of a Conflict Appeared, Special 
Counsel Was Appointed. 

In the case at bar, shortly prior to July 26, 1963, 
appellant, acting as attorney for the receiver, prepared 
an application for the authority to employ an auditor. 
[Finding of Fact 12.] The reasons for the necessity 
of employing an auditor are contained in Paragraph 1 
of said application, and in pertinent part, read as fol- 
lows: 

"That questions have arisen in the course of ad- 
ministration by the receiver in this proceeding re- 
specting certain transactions between the above- 
named debtor, on the one hand, and one Santa 
Monica Plumbing & Supply Co., on the other 
hand. Additional questions have arisen respecting 
transactions between certain principals of the debt- 



—43— 

or, and by way of specification and not by way of 
limitation, the president thereof, Mr. Jack Manil- 
di, Sr., and involving- transfers of real property 
any other assets reputed to have been made from 
the debtor to said principals. That it is necessary 
for the protection of the assets of this estate and 
to enable the receiver to ascertain whether or not 
any valuable causes of action exist in favor of 
this estate as against said named parties and/or 
other third parties relative to said transactions, 
that an accounting be taken and that a review 
from an accounting standpoint be made of the 
books and records both of the debtor and said 
other parties." [Clk. Tr. pp. 16-17.] 

The aforementioned application was prepared approx- 
imately one month and twenty days following the court's 
order approving appellant's employment as counsel for 
the receiver, and taking into account the complexities 
and magnitude of the debtor's business, does not appear 
to be an excessive amount of time between the com- 
mencement of appellant's employment and the prepara- 
tion of said application. 

Thereafter, on July 29, 1963, an order was entered 
authorizing the receiver to employ an accountant for 
the purposes described in said application. On August 
19, 1963, in the course of a conference attended by 
the receiver, appellant, the accountant, and Hubert F. 
Laughran, attorney for the creditors' committee, said 
accountant orally reported that, in his opinion, it ap- 
peared likely that there were claims against Santa Mon- 
ica Pipe & Supply Co. in favor of the receiver, and, 
although he had not completed his investigation at that 
point, his suspicions were aroused as to whether there 
also might be claims against the Manildis individually. 
[Finding of Fact 13.] 



Immediately following the aforementioned meeting, 
appellant conferred with the receiver, and suggested 
that the receiver should employ other counsel to ad- 
vise him with regard to claims which might develop 
against the Manildis. 

On or about August 28, 1963, proposed special coun- 
sel prepared, and on August 30, 1963, the receiver 
filed, an application for authority to employ special 
counsel. In Paragraph III of said application the re- 
ceiver sets forth the reasons for the necessity of em- 
ploying special counsel which, in pertinent part, read 
as follows : 

"Santa Monica Plumbing Supply Co. was car- 
ried on and operated at all times as a 'division' of 
the debtor. There were many inter company trans- 
actions. The debtor's principal secured creditor is 
the Bank of America and the said Jack Manildi 
caused Santa Monica Plumbing Supply to guaran- 
tee the said account and likewise caused the debtor 
corporation to guarantee Santa IMonica Plumbing 
Supply Company's account with the Bank of 
America. 

"That the debtor corporation purchased and ac- 
quired merchandise for resale and transferred the 
some to Santa Monica Plumbing Supply Company 
at cost. There were certain transactions of a much 
lesser amount by which Santa Monica Plumbing 
Supply Company sold to the debtor merchandise 
which it acquired at cost. 

"Investigation is also being conducted with respect 
to the transactions between the debtor and Santa 
Monica Plumbing Supply Company with Jack Ma- 
nildi. 

"The investigations upon these matters have not 
been concluded and the creditors' committee has 



—45— 

demanded there be a reservation in the plan of 
arrangement giving to the receiver upon behalf of 
the creditors, all rights of action which may be 
asserted as the result of said investigation." [Clk. 
Tr. at p. 53.] 

In Paragraph IV of said application, the receiver 
summarizes the then state of the investigations as fol- 
lows: 

"The receiver alleges it will be in the best inter- 
ests of the administration herein and the creditors 
that the receiver be authorized to employ the said 
firm of Craig, Weller & Laugharn as special coun- 
sel to pursue and conclude the said investigation, 
and, should the facts so warrant to institute in 
the name of the receiver as plaintiff appropriate 
proceedings to recover any assets or sums of mon- 
ey which the debtor and/or the receiver may be 
entitled to receive from Santa Monica Plumbing 
Supply Company and Jack and Vina Gale Manil- 
di." [Clk. Tr. at pp. 53-54.] (Emphasis added.) 

It is clear that at the time the receiver filed his 
application for the employment of special counsel on 
August 30, 1963, there still was substantial conjecture 
as to the nature of the claim, if any, which the re- 
ceiver might have against Santa Monica Plumbing 
Supply Co. and/or the Manildis. On August 30, 1963, 
the court authorized the receiver to employ special coun- 
sel for the purposes contained in the aforementioned 
application. Appellant having withdrawn from advis- 
ing the receiver with respect to these potential claims, 
took no further part in any of the matters upon which 
special counsel had been employed to "investigate fur- 
ther." 



(3) An Action Filed by Special Counsel Against the 
Manildis Was Settled With Court Approval Without 
Establishing That the Manildis Were Liable to the 
Receiver for Diverting Assets of the Corporate Debtor. 

On or about September 20, 1963, special counsel 
prepared for the signature of the receiver, an appHca- 
tion for authority to file an action against Santa Moni- 
ca Plumbing Supply Co., Jack Manildi and his wife, 
Vina Gale Manildi. Paragraphs II, III and IV of said 
application contain the reasons for the necessity of 
filing said action as determined by special counsel, and 
read in pertinent part as follows : 

II. 

"That the debtor has filed herein its Plan of Ar- 
rangement which provides in part the following: 
'The receiver and the creditors will waive any 
claim they have for and on behalf of the estate 
and themselves against Jack and Vina Gale Ma- 
nildi and Santa Monica Plumbing Supply Com- 
pany, unless at the time of the hearing re appli- 
cation for confirmation, such actions at law are 
already on file.' 

III. 

"The receiver respectfully alleges that he has var- 
rious causes of action against Jack Manildi and 
Vina Gale Manildi, officers, directors and owners 
of the capital stock of the debtor and also against 
Santa Monica Plumbing Supply Company, a cor- 
poration, formerly owned by the debtor and now 
owned by the said Manildis." 

IV. 
"Said causes of action pertain to the alleged 
indebtedness of said Jack Manildi, Vina Gale Ma- 
nildi and Santa Monica Plumbing Supply Com- 



-^7— 

pany to the debtor and further that the release and 
transfer by the debtor of the capital stock and 
ownership of Santa Monica Plumbing Supply 
Company was a fraudulent transfer and was a 
scheme, plan and design to deprive the debtor there- 
of. The receiver has various other causes of ac- 
tion against the three proposed defendants." [Clk. 
Tr. atpp. 58-59.] 

In essence, the application for authority to file the 
action against Santa Monica and the Manildis states 
that the "spin-off" of Santa Monica from the debtor 
was for inadequate consideration, and in effect that the 
assets of Santa Monica to some extent constitute the 
assets of the debtor. The application also mentions the 
fact that the receiver has other causes of action against 
the Manildis individually, but none are defined. Prob- 
ably the most important aspect of the application is 
the fact, as recited in Paragraph II thereof, that under 
the Plan of Arrangement then on file, unless an ac- 
tion was on file at the time of the hearing re applica- 
tion for confirmation of the Plan of Arrangement, 
such actions would be waived. The hearing in regard to 
the confirmation of the Plan of Arrangement was set 
for September 23, 1963, just three days after the afore- 
mentioned application for authority to file an action 
against the Manildis and Santa Monica was filed. 
[Clk. Tr. at p. 68.] Special Counsel, not wishing to 
lose any cause of action he might have against the Ma- 
nildis, requested by his September 20, 1963 applica- 
tion, authority to file suit against the Manildis and 
Santa Monica, and in fact, subsequent to receiving the 
court's permission, filed said action on September 23, 
1963, the very day scheduled for the hearing in regard 
to the confirmation of the Plan of Arrangement. 

The hearing re confirmation was first continued to 
September 25, 1963, and subsequently to September 



27, 1963, at which time the court entered its order con- 
firming the plan. [Clk. Tr. at p. 68.] Said order re- 
served to the receiver all rights as against the Manil- 
dis and Santa Monica Plumbing & Supply Co. pre- 
viously asserted in the action filed by special counsel on 
September 23, 1963, and further recognizes the exist- 
ence of a trust established by those general creditors of 
the debtor whose claims were guaranteed by the Ma- 
nildis. [Finding of Fact 17.] In summary, the court 
reserves to the receiver the causes of action against 
Santa Monica Plumbing & Supply Co., and the Manil- 
dis which were contained in the action filed by special 
counsel on September 23, 1963, and at the same time, 
approves the provisions of a trust the corpus of which 
contains real property standing in the name of the 
Manildis. The approval of the provisions of this trust 
automatically placed the corpus beyond the reach of the 
receiver. 

On April 18, 1965, the receiver filed an application 
prepared by special counsel requesting permission to 
compromise the action filed against Santa Monica 
Plumbing Supply Co., and the Manildis on September 
23, 1963. According to said application: 

11. 

"That under the agreements made herein for the 
collecting and impounding of funds resulting from 
the collection of accounts receivable of said Santa 
Monica Plumbing Supply Co., Inc., a trust account 
was opened in the Bank of America, 660 South 
Spring Street, Los Angeles, California, in the 
name of Hubert F. Laugharn and William J. Tier- 
nan, into which the funds from the collections 
were to be deposited. There is a present balance 
of $38,035.13 therein." 



—49— 

III. 

"The receiver has received an offer from Santa 
Monica Plumbing Supply Co., Inc., and Jack Ma- 
nildi and Vina Gale Manildi to compromise the 
said pending litigation under which compromise the 
receiver is to receive the sum of $32,000.00. This 
sum has been delivered to the receiver and he is 
holding the same in trust until the action of the 
referee upon his within application. The receiver 
has agreed to release the balance of the impound- 
ed funds, to wit, $6,035.13 in said trust account 
and $4,414.38 in the account of Santa Monica 
Plumbing Supply Co., Inc. in United California 
Bank, Santa Monica Branch, to Santa Monica 
Plumbing Supply Co., Inc., Jack Manildi and Vina 
Gale Manildi, and the savings account in the Union 
Bank in the amount of approximately $20,900.00. 
The receiver has also agreed to release and assign 
to Jack Manildi and to Santa Monica Plumbing 
Supply Co., all accounts receivable of Santa Mon- 
ica Plumbing Supply Co., heretofore collected or to 
be collected in the future. They to be accountable 
for said funds if the receiver's application is not 
approved." [Clk. Tr. at pp. 88-89.] 

On or about April 18, 1965, the court approved the 
compromise of the aforementioned litigation for the 
amount set forth in the application, and in essence, 
permitted the receiver to settle all claims which it may 
have had against Santa Monica and the Manildis for 
the sum of $32,000.00, which sum was paid from Santa 
Monica's accounts receivable. As the application indi- 
cates, substantial sums were returned to both Santa 
Monica and the Manildis. The Manildis have not since 
been adjudicated bankrupt. 

Whether the receiver ever actually had a collectible 
claim against the Manildis, individually, will never be 



—50— 

known. The litigation filed by special counsel for the 
receiver on September 23, 1963, named the Manildis 
as defendants. However, the settlement of that litiga- 
tion did not involve the Manildis directly paying any 
of the sum received by the receiver. The important 
fact to note is, however, that immediately following 
the accountant's oral report on August 19, 1963, appel- 
lant withdrew from advising the receiver with respect 
to the possibility of establishing a claim against the 
Manildis. Special counsel was immediately appointed to 
pursue the investigation w^hich had been started by 
the accountant, and continued to handle the litigation 
which was subsequently filed to its conclusion. Ap- 
pellant in fact did not represent an interest adverse to 
the receiver on a matter upon which he was employed 
for such receiver in that when the possibility of a con- 
flict appeared, he immediate^ withdrew. 

(4) Appellant's Representation of the Receiver Until the 
Time Special Counsel Was Appointed in No Way Con- 
flicted With the Receiver's Possible Rights to Recover 
Assets From the Manildis. 

The referee and the District Court have made find- 
ings in the case at bar to the effect that appellant's 
representation of the receiver during the brief period 
from June 6, 1963, until the appointment of special 
counsel on August 30, 1963, in some way may have 
hindered the receiver in establishing his claim against 
the Manildis. Each of these findings of fact will be 
examined separately, and it will be seen that all of 
them stand for the position previously asserted by the 
referee and the District Court, that the theoretical pos- 
sibility of a conflict, even though the same is not shown 
to exist in fact, is sufficient to deny reasonable com- 
pensation to appellant under General Order 44. 



—Si- 
Finding of Fact 22 reads as follows : 

"22. That Grodberg's representation of Amstan, 
in connection with which he sought to recover 
from the Manildis, was in substantial conflict 
with the receiver's possible rights to recover from 
the Manildis." 

Initially, the problem with this finding is that any- 
time an attorney represents any person other than the 
receiver, there is the possibility that such representa- 
tion may conflict with the receiver's right to recover any 
sums which may be due from such person. However 
implicit in Finding of Fact 22 is the conclusion that 
the receiver did have some right to recover from the 
Manildis. By innuendo, the court assumes this fact, 
and then uses it to support the conclusion contained in 
this finding. As the foregoing analysis has indicated, 
the possibility of such a right was not substantiated 
until the accountant gave his oral report on August 
19, 1963, and thereupon appellant withdrew and spe- 
cial counsel was appointed. Furthermore, it was never 
proved that the receiver did in fact have such a claim. 
The Referee and the District Court both used the 
word "possible" in defining the nature of the right 
which the receiver may have had to recover from the 
Manildis, and in determining whether it amounted to 
anything more than that, the receiver had the advise 
of special counsel. 

Finding of Fact 23 reads as follows : 

"That Amstan's levy of attachment on real prop- 
erty standing in the name of the Manildis re- 
duced, and militated against, the receiver's ability 
to effect collection of any claim or cause of ac- 
tion he may have had against the Manildis." 

As no facts are presented in support of this conclu- 
sion, appellant is confronted with the problem of ar- 



—52— 

guing that Finding 23 is simply not true. In the middle 
of July, 1963, when the receiver suggested that an ac- 
countant be appointed to explore the relationships be- 
tween the debtor. Santa ]\Ionica and the ]Manildis, ap- 
pellant immediately prepared the application for the 
employment of such accountant, which was approved 
on July 29. 1963. W^hen the accountant reported on 
August 19. 1963. that there might be claims against 
the Manildis. appellant withdrew from representing the 
receiver in this regard and special counsel was ap- 
pointed. 

If in fact Amstan's levy of attachment on the Ma- 
nildis' real property did in fact "reduce and militate 
against" the receiver's ability to effect collection of the 
claim which he asserted against the ]\Ianildis. why did 
the court approve a plan of arrangement which put 
said real property beyond the reach of the receiver? 
Furthermore, how can the receiver and the district 
court find that the receiver's ability to collect the claim 
which he asserted against the ^Manildis was "reduced 
or militated against," when the final settlement of the 
litigation filed by special counsel resulted in returning 
funds over which the receiver had control to Santa 
Monica and the Manildis? It must be presumed that 
special counsel and the receiver did not return to Santa 
^Monica and the ^Manildis any property to which the 
receiver had a valid claim, and. therefore, it is im- 
possible to ascertain the facts upon which the referee 
and the District Court rely to support Finding of Fact 
23. 

Finding of Fact 24 reads as follows : 

"That Grodberg's representation of Amstan ren- 
dered it improbable that he would advise the re- 
ceiver that an involuntary petition in bankruptcy 
against the Manildis should be considered, and. if 
possible, filed, so as to avoid the various attach- 



—53— 

merits levied by the 'guarantee' creditors, includ- 
ing Amstan, on real property standing in the names 
of the Manildis." 

Again, the referee and the District Court have as- 
sumed as the basis of this finding, that appellant, prior 
to the time he withdrew from representing the receiver 
with regard to possible claims against the Manildis, 
should have advised the receiver to consider an in- 
voluntary petition in bankruptcy against the Manildis. 

Although the referee suggests that perhaps an in- 
voluntary petition in bankruptcy against the Manildis 
should have been considered, the record does not dis- 
close any grounds upon which such a petition could be 
predicated, nor does the subsequent settlement of the 
litigation filed by special counsel for the receiver in- 
dicate that the same had any chance of success. In es- 
sence, the referee and the District Court have simply 
repeated Finding of Fact 20 which states that dual 
representation in the case at bar per se results in "an 
actual, if not yet known, conflict of interest." In Find- 
ing of Fact 24 the referee and the District Court simply 
speculate as to possible ways in which this conflict 
might manifest itself. 

Finding of Fact 25 reads as follows : 

"That Grodberg's representation of Amstan fur- 
ther rendered it improbable that he would have 
effectively advised the receiver in relation to any 
possible course of action which might conflict with 
or impede, the prior and secured position of Am- 
stan in relation to the Manildi real property, or 
otherwise." 

Again, the referee and the District Court have re- 
peated their basic proposition that an attorney is pre- 
vented, per se, from representing a receiver and a gen- 



—54— 

eral creditor whose claim is guaranteed by the prin- 
cipals of the corporate debtor. 

In reply to these findings, appellant simply states 
that the record discloses no instance where he actually 
represented an interest adverse to the receiver in a mat- 
ter upon which he was employed for such receiver, and 
theoretical possibilities that he might have done so are 
insufficient to grant to the court the discretion to deny 
him under General Order 44, reasonable compensation 
for his services. 

IV. 

The Denial of Reasonable Compensation to Appel- 
lant for His Representation of the Receiver Con- 
stitutes an Abuse of Any Discretion the Court 
May Be Given by General Order 44. 

(1) Woodruff, 121 F. 2d 152 (1941), and Barry Yao Com- 
pany, 172 F. Supp. 375 (1959), Do Not Support the 
Referee's and the District Court's Decision That in 
the Case at Bar, General Order 44 Requires the Denial 
of All Fees to Appellant. 

General Order 44 provides that : 

If without disclosure any attorney acting for a 
receiver . . . shall have represented any interest 
adverse to the receiver ... in any matter upon 
which he is employed for such receiver .... the 
court may deny the allowance of any fee to such 
attorney, or the reimbursement of his expense, or 
both, and may also deny any allowance to the re- 
ceiver ... if it shall appear that he fails to take 
diligent inquiry into the connections of said attor- 
ney." (Emphasis added.) 

The court has held that appellant's failure to set 
forth in his affidavit the facts of his representation 



—55— 

of Amstan, and the guarantee of its claim by the Ma- 
nildis, constitutes a substantial violation of and non- 
compliance with, the provisions of General Order 44, 
"which requires disallowance of any compensation to 
which he might otherwise be entitled as attorney for the 
receiver herein." [Conclusion of Law 5.] (Emphasis 
added.) 

The referee in his memorandum In re Applica- 
tion for Compensation [Clk. Tr. pp. 139-157] cites in 
support of this determination, both In re Woodruff, 
121 F. 2d 152 (1941), and In re Barry Yao Company, 
172 F. Supp. 375 (1959). In Part i of this Argu- 
ment, the court's decision in Woodruff was considered 
in detail, and, as will be remembered, the court denied 
fees to Turnbull & Meyberg by examining the record, 
and by determining as the result of such examination 
that no necessity in fact had existed for the employ- 
ment of counsel. The court in Woodruff never found 
that Turnbull & Meyberg represented an interest ad- 
verse to the receiver in a matter upon which they were 
employed for such receiver. 

In re Barry Yao Company, 172 F. Supp. 375 
(1959), involved an application for attorneys' fees 
filed by attorneys who had been appointed special coun- 
sel for the receiver. The court stated the question be- 
fore it as follows : 

"So the specific problem presented is whether at- 
torneys who misrepresent 'the value and extent of 
the services rendered' as counsel for a receiver, 
when petitioning for fees pursuant to Section 62, 
Sub. d of the Bankruptcy Act, are entitled to com- 
pensation for such services as they in fact ren- 
dered during their employment by the receiver; and 
if so, whether such misrepresentations affect the 
amount of the allowance to which the attorneys 
would otherwise be entitled." {Id. at p. 380.) 



—56— 

In answer to this question, the court determined 
that the attorneys requesting fees had failed to fully 
and accurately disclose in their petition the material 
fact as to the "value and extent" of their services as 
special counsel for the receiver, and by a review of the 
legislative history of Section 62 (Subdivision d) de- 
termined that the court was justified under such cir- 
cumstances in denying all fees. Relying on an inter- 
pretation of the requirements of Subdivision d of Sec- 
tion 62, is of little assistance in the case at bar. The 
only question before the court is the interpretation 
and application of General Order 44, the alleged viola- 
tion of which resulted in the denial of reasonable com- 
pensation to appellant. 

The court, in exercising its discretion to deny all 
fees to appellant, undoubtedly is reflecting its basic 
view of the requirements of General Order 44. Accord- 
ing to the referee : 

"It would be my view that an attorney who rep- 
resents one or more general creditors takes the 
risk of the penalties imposed by General Order 44 
(11 U.S.C.A. following section 53) if, thereafter, 
adverse position should develop in respect to any of 
the claims represented by him. To permit excep- 
tions, although equitable reasons might exist, is 
to place an unnecessary burden on the court." 
[Clk. Tr. at p. 152; Referee's Memorandum, p. 
15, lines 4-10.] 

If this court were to sustain the position taken in 
the foregoing quotation, it would immediately eliminate 
dual representation, and the benefits which Congress 
hoped would accrue therefrom. For example, it is al- 
ways possible that sometime after dual representation 
is undertaken, the trustee may object to a claim filed 
by an unsecured creditor who is represented by the 



—57— 

same attorney who represents the trustee. It seems in- 
conceivable that such an objection would disqualify an 
attorney from being compensated for services performed 
over a period of years in unrelated matters. But ac- 
cording to the referee, any attorney undertaking dual 
representation "takes the risk of the penalties" if there- 
after adverse positions should develop in respect to any 
of the claims represented by him. It is submitted that 
General Order 44 does not require an attorney under- 
taking dual representation to play "Russian Roulette" 
with his fees, knowing that should anyone, including 
the trustee, object to the claim of an unsecured creditor 
he might represent, this fact would ipso facto give the 
court the discretion to deny to him all attorneys' fees 
which he had earned. (Such an interpretation is espe- 
cially untenable when a claim of conflict is made in 
bad faith and subsequently never proved.) 

(2) Chicago & West Town's Railway v. Friedman, 230 
F. 2d 364 (1956), and In re Philadelphia W. Ry. Co., 
73 F. Supp. 169 (1947), Are Controlling and Set Forth 
the General Rule That : 

(i) Once the Possibility of a Conflict of Interest 
Arises, an Attorney Should Withdraw as Appel- 
lant Did in the Case at Bar, and 

(ii) An Attorney Should Be Compensated for Bene- 
ficial Service Performed Which Are Unrelated to 
the Matter Giving Rise to the Possibility of a 
Conflict. 

It is submitted that the proper course of action once 
the possibility of a conflict becomes apparent, is for 
the attorney to withdraw as appellant did in the case 
at bar. Although appellant's research has failed to dis- 
close any decision considering this question with re- 
spect to the requirements of General Order 44, both 
Chicago & West Town's Railway v. Friedman (C.A. 



—58— 

7 1956), 230 F. 2d 364, and In re Philadelphia & 
W. Ry. Co., 73 F. Supp. 169 (1947), consider the 
questions of "timing a withdrawal" in the context of 
reorganization proceedings commenced under the Bank- 
ruptcy Act, and compensation for beneficial services 
rendered in matters unrelated to the conflict. 

In Chicago & West Towns Railway v. Friedman 
the debtor was a public utility engaged in furnishing 
transportation in the Chicago area. It had outstanding 
first mortgage bonds totaling in excess of $2 million, 
on which on July 1, 1947, there was a default in the 
matured principal and semi-annual interest. 

In September, 1947, two bondholders' committees 
were permitted to intervene. One was known as the 
Leason Committee, and was represented by attorneys 
Raymond B. Morris and Harry A. Biossat. The sec- 
ond one was known as the Friss Committee, which was 
represented by attorneys William J. Friedman and 
Maurice Rosenfield, members of the firm of Friedman, 
Zoline & Rosenfield. 

For a period of almost five years negotiations were 
undertaken to sell the company to the Chicago Transit 
Authority. When the aforementioned negotiations col- 
lapsed in the early part of 1953, Chicago Aurora & El- 
gin Railway Co. offered to purchase the company. The 
court eventually approved the plan to sell the com- 
pany to Aurora & Elgin, and Maurice Rosenfield and 
William J. Friedman petitioned for fees regarding their 
employment as attorneys for the Friss bondholders' 
committee. Among the objections filed were that they 
were precluded from recovering compensation due to 



—59— 

the fact that they had represented an interest conflict- 
ing with that of the debtor. In finding such a confHct, 
the court stated as follows : 

"Throughout the reorganization, petitioners' 
(Friedman - Rosenfield) law firm was general 
counsel for Aurora-Elgin. The appearance for the 
(Friss) committee was filed by the firm Fried- 
man, Zoline & Rosenfield. Petitioner's partner, Zo- 
line, was a director and also a secretary of that 
company (Aurora-Elgin)." {Id. at p. 368.) 

And further at page 369 : 

"When the conflict of interest arose in May, 1963, 
petitioner could have follozved the example of Bell, 
Boyd, Marshall & Lloyd and have withdrazvn as 
counsel of the Friss committee. Not having done 
so they should be penalized any amount for fees 
that may be made." (Emphasis added.) 

Notwithstanding the apparent conflict in representa- 
tion, and the failure to withdraw, the court went on 
to permit Friedman and Rosenfield to recover fees for 
the work they had done prior to the time the conflict 
arose. 

In Chicago & West Town's Raihvay, the facts re- 
cited by the court tend to indicate that the law firm 
of Friedman, Zoline & Rosenfield represented Aurora- 
Elgin, the ultimate purchaser, even before the last- 
mentioned organization offered to buy the assets of 
the debtor. As will be remembered, at this time Fried- 
man and Rosenfield were also representing the Friss 
Committee. It would seem that in this situation there 
is at least a possibiHty of a conflict. Rosenfield and 
Friedman might have advised the bondholders' com- 



mittee not to consent to a plan whereby the assets of 
the debtor would be sold to the Chicago Transit Au- 
thority, thereby making such assets available to their 
client, Aurora-Elgin. Yet, since the court did not find 
any conflict in fact prior to the time when Aurora- 
Elgin made its offer to purchase the debtor's assets, the 
court awarded to Rosenfield and Friedman the reason- 
able value of their fees for representing the Friss Com- 
mittee prior to the time the conflict arose. 

Similar In re Philadelphia & W. Ry. Co., the Court 
considered the question of whether the fact that the 
same firm of attorneys represented both the indenture 
trustee and a group of bondholders required it to dis- 
allow compensation. In concluding that the nature of 
the interests represented did not require the disallow- 
ance of compensation, the court stated as follows : 

"Thus, where an attorney represents a large num- 
ber of individual bondholders there is always a 
possibility that a minority will find that their in- 
terests lie in one direction and the majority in 
another. When this situation arises the attorney 
may not continue to represent all but until it does 
it has never been suggested that his representation 
of the group is improper." (Id. at p. 172.) (Em- 
phasis added.) 

In the case at bar, the possibility that the receiver 
might have claims against the Manildis did not arise 
until the accountant made his oral report on August 
19, 1963. Immediately thereafter appellant withdrew 
from advising the receiver with regard to the possibili- 
ty of establishing such claims. In the receiver's appli- 
cation for the employment of special counsel which was 



—61— 

filed on August 30, 1963, the stated purpose was to 
investigate further the possibility of establishing such 
claims. 

It is submitted that appellant withdrew from the 
situation giving rise to the possibility of a conflict as 
soon as the same became apparent. He thereafter con- 
tinued to work for the receiver for a period in excess 
of two years on matters totally unrelated to any claims 
the receiver might have against the Manildis. 

Following the filing of his application for attorney's 
fees on May 10, 1966, appellant for the first time was 
informed that the "possibility of a conflict" which 
appeared some two years before, from which appellant 
withdrew, with regard to which special counsel was 
appointed, and which in fact was never proved, re- 
quired the court under General Order 44 to deny all fees 
to which he might otherwise be entitled. 

In support of this position the referee and the Dis- 
trict Court cite numerous possibilities of conflict, but 
none of them in fact existed. If permitted to stand, 
the court's decision in the case at bar would have the 
effect of greatly increasing the costs of administra- 
tion. Each receiver and trustee would have his own 
permanent personal attorney, none of whom would be 
directly responsible to the creditors whose interests 
were actually being administered, and all of whom would 
share in the bankrupt estate prior to its distribution. 

In 1938 when Congress added Subdivision (c) to 
Section 44 of the Bankruptcy Act, the stated purpose 
was to reduce the cost of administration by permitting 
dual representation. This addition and the economies 



—62— 

which it is designed to promote should not fall before 
the sophistry of "actual, if not yet known, conflicts of 
interest." 

Conclusion. 

It is respectfully submitted that the judgment of 
the District Court be reversed, and that appellant be 
granted the reasonable value of his services as attor- 
ney for the receiver, as found by the referee. 

Respectfully submitted, 

Beardsley, Hufstedler & 
Kemble, 
By Stephen R. Farrand, 

Attorneys for Appellant, 
Haskell H. Grodbreg. 



Certificate. 

I certify that, in connection with the preparation of 
this brief, I have examined Rules 18, 19 and 39 of the 
United States Court of Appeals for the Ninth Circuit, 
and that, in my opinion, the foregoing brief is in full 
compliance with those rules. 

Stephen R. Farrand 



APPENDIX A. 

No. 923. 

IN THE UNITED STATES DISTRICT COURT, 
FOR THE DISTRICT OF NEVADA. 



In the Matter of 

Gal-Neva Lodge, Inc., a Nevada Corporation, 

Debtor. 



In Proceedings for an Arrangement, Chapter XL 



Order Affirming Fees Allowed by Referee. 



This matter is before the Court on the petitions of 
the United States and of Sanford D. Adler to review 
the fees ordered paid to the attorneys for the debtor in 
possession. 

The affairs of Cal-Neva Lodge, Inc. have been fully 
administered in a Chapter XI proceeding which resulted 
in the liquidation of the properties of the corporation 
under an approved plan of arrangement. Some eleven 
years have elapsed since the petition for an arrange- 
ment was filed. 

A fund remains subject to the control of the Court 
which is available for the defraying of expenses of ad- 
ministration, the balance to be paid to Sanford D. Ad- 
ler, a creditor, who subordinated his claims against the 
debtor corporation, of which he was the principal stock- 
holder, to those of all other corporate creditors. The 



— 2— 

approved claims of all other creditors have been paid in 
full. 

The United States, derivatively, asserts the same 
right as does Adler. The United States has obtained a 
judgment for delinquent taxes against Adler and has 
levied upon Adler's claim against the debtor corporation. 
To the extent the Referee's allowance of attorney fees 
out of the estate might be reduced, the United States 
will benefit by pro tanto application of the sum dis- 
allowed to satisfaction of its claim against Adler. 

Petitions for allowance of fees filed by the attorneys 
were duly noticed and objections thereto filed by the 
United States and Adler. Extensive hearings were 
held, briefs, proposed findings of fact and objections 
to the proposed findings were filed with the Referee, 
and the Referee ultimately entered extensive findings 
of fact and conclusions of law and allowed additional 
fees of $125,000 to the attorneys for the debtor in pos- 
session. 

The Court has read the petitions or proofs of claim 
submitted by the attorneys and the transcript and other 
evidence submitted. The findings of the Referee are 
supported by substantial evidence and are adopted and 
approved by the Court (General Order 47). 

Of course, the allowance of compensation to bank- 
ruptcy officers and attorneys may always be open to 
re-examination until the estate is closed. Goodman 
V. Street (9 CCA 1933), 65 F. 2d 686; Collier on Bank- 
ruptcy, 14th Ed., Vol. 2, §39.18, p. 1484. The amount 
of just compensation for attorneys in any particular 
case is a matter of opinion and discretion. The gen- 
eral guidelines are that an estate should not, on the one 
hand, be unreasonably mulcted for the benefit of the at- 



— 3— 

torneys, and that the attorneys, on the other hand, 
should not be awarded niggardly compensation for val- 
uable services. The Referee's exercise of discretion in 
this area is subject to review. Official Creditors Com- 
mitte of Fox Markets, Inc. v. Ely (9 CCA 1964), 
337 F. 2d 461. 

The Referee who allowed the fees supervised most of 
the proceedings. The allowances made are certainly not 
niggardly, but the facts as found by the Referee amply 
justify the allowance not only on a time basis but with 
reference to the results achieved and the benefits to the 
estate. "He was in a far better position than we to 
appraise how valuable * * >(c 5^ (the) ***=!< services 
were in reducing asserted claims; that is, to know 
whether the accomplishment was an easy or difficult 
one." Miller v. Robinson, Trustee (9 CCA, May 3, 
1967), F. 2d 

The only substantial question of law presented by the 
Petition for review is that Aaron Levinson, now de- 
ceased, one of the court-appointed attorneys for the 
debtor in possession, should be allowed no compensa- 
tion for his services because of the failure of the initial 
petition for appointment of attorneys to disclose ad- 
verse interests, in violation of General Order 44. The 
petition of debtor corporation for the employment of 
counsel alleges, In part : 

"That your petitioner proposes, upon the grant- 
ing of this petition to [retain] LESLIE E. RIG- 
GINS, of Reno, Nevada, the firm of QUITT- 
NER AND STUTMAN, of Los Angeles, Cali- 
fornia, and AARON LEVINSON of Beverly 
Hills, California, as counsel, who have agreed to 
accept such amount as may be fixed by this Court 



as compensation for any services rendered to your 
petitioner, which attorneys and firm of attorneys 
is now the attorney for the Debtor and whose in- 
terest is not adverse to that of the Debtor in 
possession or to the administration of this estate." 

The objectors complain that Levinson was then the 
personal attorney of Sanford D. Adler, the principal 
stockholder and a large creditor of debtor corporation, 
and the personal attorney of several other creditors of 
debtor corporation whose claims aggregating in excess 
of $650,000 were subsequently filed in the proceeding 
by Levinson. 

We conceive no adverse interest between a principal 
stockholder of a corporation and a corporation debtor in 
possession in a Chapter XI proceeding. With respect 
to corporate creditors, on the face of things their 
rights are adverse to the debtor in possession, and if it 
were not for a specific provision of the Bankruptcy 
Act, this Court would seriously consider disallowing 
Levinson's fee because the petition failed to disclose 
Levinson's connection with the creditors he represented. 
Proper practice requires such disclosure in any event 
under General Order 44. But Congress has seen fit ex- 
pressly to declare that an attorney shall not be dis- 
qualified to act as attorney for a receiver or trustee 
merely by reason of his representation of a general 
creditor [11 U.S.C. 72(c)], and a debtor in possession 
is in substantially the same position as a trustee [11 
U.S.C. 742]. In a bankruptcy context, the Referee's 
Finding No. XIII that "Levinson represented no in- 
terest adverse to the creditors or stockholders of Cal- 
Neva Lodge. Inc." is correct. Although the petition 
was deficient in failing to disclose "all of the attorney's 



— 5— 

connections with the bankrupt or debtor, the creditors 
or other parties in interest" (General Order 44), a dis- 
allowance of fees should follow only "if without dis- 
closure any attorney acting for *■ * * a debtor in pos- 
session shall have represented any interest adverse to 
the creditors or stockholders in any matter upon which 
he is employed for such * * * debtor in possession." 
It is conceded by all that Levinson did not in fact rep- 
resent an interest adverse to the debtor in possession. 
In the language of the brief of the United States, 
"The objector has no proof of bad conduct on the part 
of Mr. Levinson, but the law does not require such 
proof." In In Re Barceloux (9 CCA 1934), 74 F. 
2d 289, the Court said : 

"In the case at bar, no rule of court was vio- 
lated. The participation of Freeman as an attorney 
was open, and the services rendered admittedly 
were valuable and a benefit to the estate, and this 
is no controversy as to division of fees between 
attorneys, and, in any action taken in rendering the 
services for which compensation was allowed, there 
was no conflict with the interest of the estate. 

"In considering the principle here involved, this 
court in In re Rury (CCA. 9) 2 F. 2d 331, page 
332, in a decision by Judge Rudkin, said: 'Peti- 
tioner also sought to disqualify the attorney who 
appeared before the state court for the trustee upon 
the ground that he had also acted as attorne}^ for 
a creditor of the estate. The latter fact is denied, 
but the fact itself is not material ; nor is it material 
to inquire whether the question is properly before 
us. There is no necessary conflict in interest be- 
tween a creditor and a trustee in bankruptcy, and, 



if the two see fit to join forces and employ the 
same attorney in an effort to recover assets, the 
adverse party or a stranger will not be heard to 
complain.' 

"There was a similar holding in In re Levinson, 
supra." 

In In re Woodruff (9 CCA 1941), 121 F. 2d 152, 
an allowance of attorney fees was denied because, 
among other things, the petition failed to dis- 
close that the attorneys whom the trustee sought to re- 
tain represented a large creditor whose claim was dis- 
puted by the trustee. This is not the situation here. 

If Mr. Levinson did represent Sanford D. Adler, he 
rendered a service to all other creditors of the debtor in 
possession by advising him to subordinate his claim to 
the claims of others. The record we have seen dis- 
closes no instance in which Levinson in fact acted ad- 
versely to the creditors of the corporation or to the 
debtor in possession. 

The policy considerations which led Congress [11 
U.S.C. 73(c)] to permit the attorney for a general 
creditor to represent a receiver or trustee (or debtor in 
possession) are not subject to review by this Court. 
Like an entrapment, which may be lawful or unlawful, 
this is a conflict of interest which is lawful rather than 
unlawful. Levinson did not act secretly; rather, for 
most of the claims he represented, his representation 
was disclosed on the claim. The failure of the petition 
for appointment of counsel to disclose his representa- 
tion of creditors was not his doing, and if disclosure had 
been made, in all probability it would not have led the 
Court to reject the appointment requested by the debtor 
corporation. 



— 7— 

In all the circumstances, Aaron Levinson and his 
personal representatives are not disqualified from re- 
ceiving compensation for Levinson's services to the 
debtor in possession. 

The Order Re Fees to the Attorneys for Debtor and 
Debtor in Possession filed by the Referee on May 10, 
1966, is hereby affirmed. 

Dated: June 16, 1967. 

Bruce R. Thompson 
United States District Judge 

Filed June 16, 1967. 



IK 



United States Court of Appeals 

I'OR THK NINTH CIRCUIT 



III till- Matter of 

I I ^ m; oAN PiPK & SlTlM 



On Appeal From the United States District Court for the 
Central District of California. 



APPELLEE S BRIEF. 



^tCBD 



840 Nor til Birch M 
S;inl;i Ann, C'll! f. 



sJ u I 



•^M. 8 Lf. 



Parker .'i- Snii, hi 



TOPICAL INDEX 

Page 
I. 
Applicable Statutory Provisions, and Preliminary 
Comment Thereon 1 

II. 
Appellant's Statement of the Case, the Facts, the 
Alleged Errors, and the "Questions Presented" 
Are Highly Distorted 5 

A. Appellant's "Statement of the Case" 13 

B. Appellant's "Statement of Facts" 14 

C. Appellant's "Summary of Argument" 20 

D. Appellant's "Questions Presented" 23 

III. 

The Finding With Respect to Appellant's Knowledge 
of the Probable Conflict of Interest, Is Supported 
by Substantial, if Not Compelling, Evidence 24 

IV. 
The Principles of Law Governing the Instant Ap- 
peal Are Contained Solely in General Order 44; 
Furthermore, Section 44(c) of the Bankruptcy 
Act Was Not Intended to, and Does Not, Affect 
in Any Manner, the Provisions of Said General 
Order 33 

V. 

The Woodruff Case Is Controlling, and the Facts of 
the Instant Case Are Manifestly Stronger in Sup- 
port of Disallowance Then the Facts of Woodruff 
40 



VI. Page 
Appellant's Dual Representation of "Amstan" and 
the Receiver, Clearly Involved a Conflict of In- 
terest 47 

VII. 
The Decisions Relied Upon by Appellant Are All 
Factually Distinguishable 49 

Conclusion 54 

Exhibit A. Findings of Fact and Conclusions of 
Law 1 



111. 
TABLE OF AUTHORITIES CITED 

Cases Page 
Albers v. Dickinson. 127 F. 2d 957 4 

C.I.R. V Duberstein, 363 U.S. 278, 80 S. Ct. 1190, 
4 L. Ed. 2d 1218 31 

Cal-Neva Lodge. Inc., Matter of (D.C. Nev.) 
(1967) 39, 52 

Chicago & West Town's Railway v. Friedman, 230 F. 
2d 364 52 

Earhart v. Callan, 221 F. 2d 160 cert, den., 350 U.S. 
829, 76 S. Ct. 59, 100 L. Ed. 740 30, 31 

Earl Scheib. Inc. v. Superior Court, 61 Cal. Rptr. 
386 46 

Englebrecht v. Bowen, 300 F. 2d 891 31 

Eureka Upholstering Co., Inc., Matter of, 48 F. 2d 

95 4 

Fine v. Weinberg, 384 F. 2d 471 49 

Flaxman v. Gardner, 353 F. 2d 764 49 

Gold V. Gerson, 225 F. 2d 859 31 

Hodges, Matter of, 4 F. Supp. 804, affirmed, sub 
nom.. United Wall Papers Factory Inc. v. Hodges, 
70 F. 2d 243 34 

Hoppe V. Rittenhouse, 279 F. 2d 3 31 

Howard v. Illinois Cent. Ry. Co., 207 U.S. 463, 52 
L. Ed. 297, 28 S. Ct. 141 38 

Hudson V. Wylie, 242 F. 2d 435, cert, den., 355 U.S. 
828, 78 S. Ct. 39, 2 L. Ed. 2d 1 31 

Itemlab, Inc., Matter of, 257 F. Supp. 764 51 

Jue V. Bass, 299 F. 2d 374 31 

L. M. Axle Co., Matter of, 8 F. 2d 581 34 



IV. 

Page 

Lines v. Falstaff Brewing Co., 233 F. 2d 927. cert, 
den., 352 U.S. 893, 77 S. Ct. 129, 1 L. Ed. 2d 88 .. 31 

Lundgren v. Freeman, 307 F. 2d 104 31 

Philadelphia & W. Ry. Co., In re, 7Z F. Supp. 169 .. 53 

Randolph v. Scruggs. 190 U.S. 533 49 

Rury, In re. 2 F. 2d 330 37 

Stratton v. New. 51 F. 2d 984, cert, den., 284 U.S. 
682, 52 S. Ct. 199, 76 L. Ed. 576 4, 45, 46 

United States v. Gypsum Co., ZZZ U.S. 364, 68 S. 
Ct. 525, 92 L. Ed. 746 31 

United States v. Merriam, 263 U.S. 179, 44 S. Ct. 
69, 68 L. Ed. 240, 29 A.L.R. 1547 39 

W. T. Byrns, Inc., In re, 260 F. Supp. 422 50 

Weil V. Neary. 278 U.S. 160. 49 S. Ct. 144, 7Z L. 
Ed. 243 2, 4 

Westmoreland, In Re, 27 F. Supp. 408 47 

Woodruff, Matter of, 121 F. 2d 152. cert. den. 314 
U.S. 652. 62 S. Ct. 99, 86 L. Ed. 522 ....4, 19, 35, 40 
43, 45, 46, 49, 51, 52, 54 

Woods V. City Nat. Bank & Sav. of Chicago, 312 
U.S. 262, 61 S. Ct. 493, 85 L. Ed. 820 ..2, 19, 47, 48 
49, 51. 52, 53 

Yu Cong Eng v. Trinidad, 271 U.S. 500, 70 L. Ed. 
1059, 46 S. Ct. 619 38 

Miscellaneous 

Los Angeles Daily Journal Report, April 30, 1968, 
Theodore A. Horn (Western Trial Lawyers' 
Conference). "Post-Trial Remedies are a Varied 
Thing", p. 11 14 



V. 

Miscellaneous Page 

General Order No. 44 1, 4, 5, 19, 33, 34, 35, 36 

40, 41, 47, 49, 51, 52, 53, 54 

General Order No. 47 30 

Rules 

Federal Rules of Civil Procedure, Rule 52(a) 30 

Statutes 

Bankruptcy Act, Sec. 30 33, 34 

Bankruptcy Act, Sec. 44(c) 4, 5, 21, 35 

36, 38, 39, 40 

Bankruptcy Act, Sec. 242 52 

United States Code, Title 11, Sec. 53 1, 33 

United States Code, Title 11, Sec. 72(c) 4, 35 

United States Code, Title 11, Sec. 642 52 

United States Code, Title 28, Sec. 2075 34 

Textbooks 

50 American Jurisprudence, Sec. 229, pp. 214, 281 
38 

50 American Jurisprudence, Sec. 242, p. 238 39 

45 California Jurisprudence 2d, Sec. 100, p. 614 39 

Canon Six of the Canons of Professional Ethics of 

the American Bar Association 47 

2 Collier on Bankruptcy (14th Ed.), Para. 14.22, 

pp. 1680, 1681, footnote 5 37 

2B 1967 Pocket Part to Baron and Holtzoff, Fed- 
eral Practice and Procedure, Sec. 1132, pp. 160-161 
31 

41 Texas Law Review, p. 935 31 



No. 22,537 
IN THE 



United States Court of Appeals 

FOR THE NINTH CIRCUIT 



In the Matter of 

Haldeman Pipe & Supply Company, a Corporation, 

Debtor. 



On Appeal From the United States District Court for the 
Central District of California. 



APPELLEE'S BRIEF. 



I. 

Applicable Statutory Provisions, and 
Preliminary Comment Thereon. 

The central, "statutory" provision involved in the in- 
stant controversy is General Order No. 44 (11 U.S.C. 
following §53), promulgated by the Supreme Court, 
and particularly the third sentence thereof, which reads 
as follows : 

"If without disclosure any attorney acting for a 
receiver or trustee or debtor in possession shall 
have represented any interest adverse to the re- 
ceiver, trustee, creditors or stockholders in any mat- 
ter upon which he is employed for such receiver, 
trustee, or debtor in possession, the court may deny 
the allowance of any fee to such attorney, or the 
reimbursement of his expenses, or both, and may 
also deny any allowance to the receiver or trustee 
if it shall appear that he failed to take diligent in- 
quiry into the connections of said attorney." 



— 2— 

This admittedly punitive provision, in substance, 
codifies v^ithin the narrow context defined, the ancient, 
moral precept that no man can, or should, serve two 
masters, which is not only a firmly established tenet of 
our Judeo-Christian civilization, but is similarly a pre- 
cept of every religious, moral or ethical system worthy 
of the name. Furthermore, the rule is erected not 
merely as a bulkwark against the substance of evil, but 
also against the mere tendency thereto. (Weil v. Neary, 
278 U.S. 160. 173, 49 S. Ct. 144, 73 L. Ed. 243, 250). 

The rule likewise recognizes the inherent difficulty, 
if not the practical impossibility, of attempting to meas- 
ure the extent or degree of damage resulting from any 
given conflict situation, after the fact, and the equally 
impossible burden which would be placed on the courts 
if they must attempt to measure the precise harm ac- 
tually resulting therefrom in each case. 

Many of the foregoing observations are clearly rec- 
ognized in the following language of the Supreme Court 
in its leading decision entitled Wood z'. City Nat. Bank 
& Sav. of Chicago, (1941) 312 U.S. 262, 61 S. Ct. 
493, 85 L. Ed. 820, at pp. 268, 269: 

"Furthermore, 'reasonable compensation for 
services rendered' necessarily implies loyal and dis- 
interested service in the interests of those for 
whom the claimant purported to act. (Citations 
omitted). Where a claimant who represented mem- 
bers of the investing public was serving more than 
one master or was subject to conflicting interests, 
he should be denied compensation. It is no anszver 
to say that fraud or unfairness were not shozmi to 
have residfed. (Cf. Jackson r. Smith, 254 U.S. 586, 
589, 65 L. ed. 418, 424, 41 S. Ct. 200). 



— 3— 

The principle enunciated by Chief Justice Taft 
in a case involving a contract to split fees in viola- 
tion of bankruptcy rules, is apposite here; 'what is 
struck at in the refusal to enforce contracts of this 
kind is not only actually evil results hut their 
tendency to evil in other cases.' (Citing, Weil v. 
Neary, supra, 278 U.S. 160). 

"Furthermore, the incidence of a practical con- 
flict of interests can seldom be measured with any 
degree of certainty. The Bankruptcy Court need 
not speculate as to whether the result of the con- 
flict was to delay action where speed was essen- 
tial, to close the record of past transactions 
where publicity and investigation were needed, to 
compromise claims by inattention where vigilant 
assertion was necessary, or otherwise to dilute the 
undivided loyalty owed to those whom the claim- 
ant purported to represent. Where an actual con- 
flict of interests exists, no more need be shown, in 
this type of case, to support a denial of compensa- 
tion. — A fiduciary who represents security holders 
in a reorganization matter may not perfect his 
claim to compensation by insisting that, although 
he had conflicting interests, he served his several 
masters equally well, or that his primary loyalty 
was not weakened by the pull of a secondary one. 
Only strict adherence to these equitable principles 
can keep the standard of conduct for fiduciaries 
'at a level higher than that trodden by the crowds. 
(See Mr. Justice Cardozo in In re Meinhard v. 
Salmon, 249 N.Y. 458. 464, 164 N.E. 545, 62 
A.L.R. 1)" (Emphasis added). 



— 4— 

Furtheremore, since General Order 44 deals with a 
"bedrock" ethical or moral principle, it is not susceptible 
to the ad hoc "exceptions" which may be made, with- 
out undue danger, as to mere technical rules predicated 
on less fundamental considerations. Indeed, it is ob- 
vious that the very efficacy of the rule will be largely 
eroded if it be accorded anything but the "strictest" con- 
struction. (See, e.g.: Weil v. Neary, supra, 278 U.S. 
160; Matter of Woodruff. (9th Cir., 1941) 121 F. 2d 
152, cert. den. (1941) 314 U.S. 652. 62 S. Ct. 99. 86 
L. Ed. 522; Matter of Eureka UpJwIsteriug Co., Inc., 
(2nd Cir.) 48 F. 2d 95: Albers z: Dickinson, (8th Cir., 
1942) 127 F. 2d 957: Cf. Strattou v. Nezv. (2nd Cir.) 
51 F. 2d 984, cert. den.. 284 U.S. 682. 52 S. Ct. 
199. 76 L. Ed. 576. holding that oral statements are 
not lawful substitutes for the prescribed affidavits). 

Although there will later be considered, in depth. Ap- 
pellant's unsupported assertion that the 1938 addition 
of subdivision (c) to §44 of the Bankruptcy Act (11 
U.S.C. §72(c)), somehow "legalizes" a conflict of in- 
terest resulting from an attorney's dual representation 
of either a receiver or trustee and, at the same time, a 
general creditor, said subsection should be set forth 
verbatim, particularly since Appellant's purported quo- 
tation thereof, appearing at page 17 of his opening 
brief herein, conspicuously omits the key word 
"merely". Said subsection actually reads as follows: 

"c. An attorney shall not be disqualified to act 
as attorney for the receiver or trustee merely by 
reason of his representation of a general credi- 
tor." (Emphasis added). 

It is readily apparent that the deliberate inclusion of 
the word "merely" was to emphasize that Congress had 



— 5— 

no intention, in adding the subsection, to abrogate, or 
alter in any respect whatever, the pre-existing provisions 
of General Order 44 proscribing conflicts of interest, 
and the inclusion of such word was clearly calculated 
to negate precisely the "construction" which Appellant 
so passionately urges herein. Appellant's significant 
omission of this key word in his purported quotation 
of §44(c), without the slightest indication thereof, even 
if unintentional, constitutes a tacit "Freudian admis- 
sion" of the key significance of the word, and of the 
obvious intent of Congress to explicitly negate even the 
slightest implication that the subsection was meant to 
legitimize conflicts of interest under any circumstances. 

II. 

Appellant's Statement of the Case, the Facts, the 
Alleged Errors, and the "Questions Presented" 
Are Highly Distorted. 

Before considering the numerous distortions of the 
facts and related matters, as contained in Appellant's 
opening brief, it is submitted that the Referee's find- 
ings of fact are correct and are uniformly supported by 
substantial evidence, in many cases by Appellant's own 
testimony. Since the Referee's Findings of Fact and 
Conclusions of Law encompass eleven (11) typewritten 
pages [Tr. of Rec, pp. 158-168, incl.] the same are 
set forth in "Appendix A", hereof. (Parentheti- 
cally, the reference to Appellant's client, American 
Radiator and Standard Sanitary Mfg. Company, as 
"Amstan", used in the Findings of Fact, will be em- 
ployed also herein for the sake of brevity). 



— 6— 

The following are significant excerpts from the 
Transcript of June 9, 1966: 

1 . Pages 3 and 4 : 

"Mr. Grodherg: Well, I believe that the orig- 
inal petition was filed on May 31, 1963, the peti- 
tion for an arrangement. Now, at that particular 
time I represented a number of unsecured credi- 
tors. One of these unsecured creditors had a per- 
sonal guarantee — 

The Referee: Which one, so that we can be 
clear on that? 

Mr. Grodberg: Oh, American Radiator and 
Standard Manufacturing Company. — 

Mr. Grodberg: They had a personal guarantee 
which they had outstanding long since upon the 
basis of which, as I understand it, they had ex- 
tended credit — 

The Referee: A personal guarantee from? 

Mr. Grodberg: Jack Manildi and Vina Gale 
Manildi, his wife." 

2. After testimony by Appellant appearing at pages 
12 and 13 of the Transcript of June 9, 1966, relative 
to a meeting on August 19, 1963, between Appellant, 
Mr. Bumb, Mr. Laugharn and Mr. Kramer, the Re- 
ceiver's accountant, concerning the latter's preliminary 
report indicating possible claims against Santa Monica 
Plumbing & Supply Company (hereinafter referred to 
as "Santa Monica") and "suspicions" as to possible 
claims against Manildi, individually. Appellant testified, 
in part, as follows, at page 15 of said Transcript: 

"Now, immediately after that meeting (of Au- 
gust 19, 1963) either in Mr. Bumb's office or 



— 7— 

in Mr. Laugharn's office, when the meeting had 
adjourned, I had a talk personally with Mr. Bumb 
and it was at that time that I put it to him and 
he agreed with me that I did not know if it was 
going to develop that there were any claims in 
favor of the Receiver against Manildi. It appeared 
to me that the Receiver shoidd have independent 
advice as to the nature and validity of those claims, 
or whatever they were, against Manildi, and that 
if it appeared that they were valid claims or that 
they were meritorious to warrant prosecution that 
he should have special counsel, both to advise him 
and to handle that prosecution, and Mr. Bumb 
agreed with this, and therefore Mr. Bumb applied 
subsequently for the employment of Mr. Laugh- 
harn as the special counsel of the Receiver. 

"Now, I voluntarily, Your Honor, stepped away 
from a situation where, as soon as it appeared to 
me there was a potential conflict or the possibility 
of a conflict between the Receiver and Manildi, 
you see, I immediately recommended to the Re- 
ceiver and he followed that, with special counsel 
being appointed — ." (Emphasis added). 

The foregoing testimony, among other matters, is 
relevant in relation to Appellant's belated contention, 
raised for the first time on appeal, that no conflict, in 
fact, ever existed! (App. Op. Br. p. 2)7, et seq.) Such 
testimony is further relevant in respect to Appellant's 
assertion that there is no evidence that August 19, 1963, 
was the "first time" Appellant informed the Receiver 



— 8— 

of the conflict (App. Br. p. 10.) While Appellant also 

states at page 10 that : 

". . . Appellant testified that he had informed 
the Receiver of this suit and attachment on sev- 
eral occasions prior to the meeting on August 19, 
1963 . . ." 

as with all his "factual" allegations, there is no ref- 
erence to the transcript, and we have failed to find 
any such testimony. [See, also. Tr. of November 14, 
1966, and December 2. 1966, p. 38.] 

3. In further reference to the existence of a con- 
flict of interest is the following testimony appearing 
at page 19 of the June 9. 1966. transcript : 

''The Referee: Why did you think he (The 
Receiver) needed special counsel? 

Mr. Grodberg: To decide whether or not the 
Receiver had any right in or to these five parcels 
(of real property owned by the Manildis. and on 
which Appellant had levied attachments, as had 
certain other 'guarantee creditors') 

The Referee: Why couldn't you do that? 

Mr. Grodberg: Well. I could not do that be- 
cause how could I advise ]\Ir. Bumb as to this 
when I represented a creditor who'd be a benefi- 
ciary of a trust to which that parcel would be 
transferred or, pursuant to the new proposal, / 
could not advise Mr. Biinib as to whether or not 
he had any right in and to that because Fd be on 
both sides of the picture, you see. That is zvhy 
if icas essential that he have the benefit of inde- 
pendent counsel. Mr. Laugharn." (Emphasis 
added.) 



— 9— 

Notwithstanding the present denial of a conflict, it 
would appear from the foregoing that Appellant was 
well aware of it on June 9, 1966. [See, also, same Tr. 
p. 21, lines 19-21, incl.] 

4. The following further testimony appears in the 
June 9, 1966, Transcript, page 28, line 14, to page 
30, line 2 : 

"The Referee: You are representing guaran- 
tee creditors and I don't expect you to tell me 
that the trust was no good or the levies were no 
good or the levies could not have been obviated 
by bankruptcy, for example. 

Mr. Grodberg: Well, all I can say is. Your 
Honor, that as far as I know the levies could not 
have been obviated by the bankruptcy of Haldeman 
Pipe & Supply. 

The Refei'ee: If he were the alter ego? 

Mr. Grodberg: Now we are getting into the 
question of alter ego. 

The Referee: I don't say that he was. I am 
merely discussing the potential lawsuits in which 
an attorney for a trustee would normally give ad- 
vice. It would be hard to get advice, I think, 
from one who is representing an attaching cred- 
itor who had a levy that he wanted to keep. 

Mr. Grodberg: That is why I did not con- 
tinue in that. 

The Referee: All of which comes to the point 
that there was an adversity of interest. . . . 

Mr. Grodberg: I honestly don't see it. Every 
time, are we to assume every time an attorney 
represents a corporation ipso facto there must be 
an alter ego possibility? 



—10— 

The Referee: No, but I venture this : every time 
you represent a trustee of a corporation you had 
better bear in mind the possibility of subsidiary 
suits against people such as stockholders, or direc- 
tors or things of that sort. 

Mr. Grodberg: Well, that is certainly, I mean, 
that is true. But I must say this. Your Honor, 
that this possibility does exist in every case, and 
if I may draw an analogy, there always exists in 
representation of any creditor that the facts may 
be found subsequently with respect to that partic- 
ular creditor's claim. 

The Referee: Do you know what happens then? 

Mr. Grodberg: He cannot represent the trustee in 
that respect." 

5. Also in the June 9, 1966, Transcript, the follow- 
ing appears at page 42, lines 14 to 23, inclusive : 

"The Referee: Let me put it: Suppose there 
had been an affidavit presented to me the first 
time, whenever it was, when you were employed; 
that affidavit stated: 'I, Mr. Grodberg, wish to 
be employed as attorney for the trustee but I do 
represent a creditor who has a claim of some sort 
against a potential defendant in a suit filed by 
the trustee', do you think I would have authorized 
that employment? 

Mr. Goldman, (Attorney for the Debtor) : If 
that was all that there was to it, I don't think 
you would." 

In the Transcript of November 14, 1966, and De- 
cember 2, 1966, the following excerpts are signifi- 
cant: 



—11— 

1. At page 38, although Appellant told the Re- 
ceiver that one of the creditors he represented held the 
guarantee of the Manildis, he could not remember when 
he told the Receiver of the attachment of the Manildi's 
real property. [See, also, p. 39, line 1, to p. 40, line 4.] 
Further, compare this testimony with the statement at 
page 10 of Appellant's Brief, that: "Appellant testi- 
fied that he had informed the receiver of this suit 
and attachment on several occasions prior to the meet- 
ing on August 19, 1963". (As previously noted, with- 
out any transcript reference in support thereof). 

2. At page 57, the following testimony of Appel- 
lant appears : 

"Q. When did you first decide that someone 
other than yourself should represent Mr. Bumb 
in connection with any possible lawsuit against Mr. 
Manildi, personally, or Santa Monica? A. (By 
Mr. Grodberg) That was on or about August 
19th. 

Q. What prompted that, sir? A. We had a 
meeting at either Mr. Laugharn's office or Mr. 
Bumb's, I don't remember which, and at that 
time Mr. Kramer was present and — 

The Referee: Just for the record, Mr. Laugharn 
represented the creditors committee ? 

The Witness: At that time he was the attor- 
ney representing the creditors committee ? 

The Referee: Yes. 

The Witness: We had a meeting at that time 
and Mr. Kramer expressed the belief that there was 
cause for collecting money against Santa Monica 
Pipe & Supply in favor of Haldeman. 



—12— 

He also raised the question generally that he 
thought that possibly the matter should be gone 
into as to whether or not there was a cause of ac- 
tion against Manildi in favor of the debtor by rea- 
son of the fact that it appeared that at some time 
years before, as I recollect it, some of the parcels 
of real property which were in the debtor's name 
had at one time, some of them, belonged to Halde- 
man. 

Following that meeting, I discussed with Mr. 
Bumb the fact that I had represented, that I did 
represent a guaranteed creditor and on whose be- 
half I had been participating over a series of some 
weeks in general discussions and in discussions 
with creditors, with attorneys representing other 
guaranteed creditors, directed towards the possibil- 
ity of making some kind of a settlement by way of 
estabHshing a trust, which ultimately was estab- 
lished, not in those terms as they were then being 
discussed, and I said in view of the fact this had 
occurred I thought probably, so that there would 
be no question about the fact whatever advice he 
obtained should be completely objective and inde- 
pendent, that he should hire Mr. Laugharn as spe- 
cial counsel. 

This was after the meeting, Mr. Bumb and I 
personally discussed this, Mr. Laugharn was not 
present at this time. 

The Referee: Why did you think he needed 
special counsel? 

The Witness: Because I had been engaged in 
discussions previously about this real property and 
Mr. Kramer had indicated that he thought that 



—13— 

there was a possiblity that he should look into 
the question of the true ownership of this property. 

The Referee: Is that some of the property you 
had levied an attachment on ? 

The Witness: That is correct. When I learned 
that I said, 'Well, I think you should get independ- 
ent counsel to advice you on this,' and that was 
done." 

A. Appellant's "Statement of the Case". 

1. Appellant states at page 2 of his Brief, that he 
was employed "as attorney for the Receiver by an Order 
made and entered on June 6, 1963" (p. 2) ; however, 
he neglects to state that he was so employed generally, 
and not merely as Special Counsel, or for some purely 
Hmited purpose only; 

2. Also at page 2, Appellant states that he was de- 
nied any compensation for services rendered as attor- 
ney for the Receiver as a result of a "possibility" of a 
conflict of interest. As the Referee properly found 
[Find. 21], on May 31, 1963, at which time Appellant 
prepared the documents authorizing his employment, 
there was, in fact, an actual conflict of interest as be- 
tween the Receiver and Amstan. Furthermore, on or be- 
fore June 6, 1963, the date on which the Order authoriz- 
ing his employment was entered. Appellant "knew, or 
should have known, that his representation of the Re- 
ceiver then was, or would be, or, at least, might become, 
in substantial conflict with his representation of Am- 
stan." [Find. 21.] See also Findings of Fact 22, 23, 24 
and 25, and Conclusions of Law 1. 2. 3 and 4. 

In short, there was, in fact, and actual conflict of in- 
terest existing even before his employment was au- 



—1 

thorized on June 6, 1963, and on or before said date 
Appellant knew, or, certainly should have known, that 
there was, at least, a distinct possibility that a conflict 
existed, or would arise, as a result of his dual representa- 
tion of both Amstan and the Receiver. 

B. Appellant's "Statement of Facts". 

Before pointing out some of the more glaring, factual 
distortions contained in Appellant's narration of the al- 
leged facts, it should be noted that there are no tran- 
script references whatever in Appellant's "Statement 
of Facts", and, further, that all too many of Appel- 
lant's "facts" are merely his interpretations thereof, 
rather than the facts as disclosed in the testimony or 
documentary evidence. That mere statements of Ap- 
pellant's interpretations of the facts in lieu of the facts 
as disclosed by testimony or documentary evidence, with 
appropriate references to the transcript, is improper, 
is clear from the following excerpt from a talk given 
by the Honorable Raymond Peters, now Justice of the 
Supreme Court of California, in 1951, as set forth in the 
Los Angeles Daily Journal Report of April 30, 1968, 
in an article by Theodore A. Horn, of the Western 
Trial Lawyers' Conference, entitled "Post-Trial Reme- 
dies are a Varied Thing", page 1 1 : 

" Tt is important in your detailed statement of 
facts never to make any statement of a material 
fact in your brief without a transcript reference. 
Never misstate the record and be very careful to 
avoid overstating the record or stating your own 
conclusions or interpretations of the facts as a fact, 
just state the facts. Leave your interpretation for 
argument' ". 



— IS— 

While Appellant states at pages 5 and 6 of his Open- 
ing lorief that after he received the phone call on June 
4, 1963, from Collen (the Chicago attorney representing 
Amstan) requesting Appellant to immediately sue the 
Manildis, and attach their real property, he notified the 
Receiver that he represented a creditor holding a per- 
sonal guaranty executed by Manildi, nevertheless, as 
found by the Referee, he significantly failed to advise 
the Receiver of the contemplated suit and attachment 
[See the Referee's Find. 11]. The following language 
from the Referee's Memorandum of May 5, 1967 [Tr. 
of Rec. p. 142] is pertinent: 

'Tt is not clear whether at the time of the prepara- 
tion of the application the applicant knew that the 
Amstan claim was guaranteed by the Manildis. 
In the transcript of June 9, 1966, page 4, line 13, 
Grodberg stated that 'when Mr. Bumb first spoke 
to me about representing him, which was at the 
very inception of these proceedings, I told him that 
I represented a creditor who had a personal guaran- 
tee (by the Manildis) . . . who were principals 
of the debtor — ^at least Mr. Manildi was, I don't 
recall whether an officer or not. They also were 
stockholders of the debtor ... (p. 5, 1.22) And 
it was with that interpretation and understanding 
that the application for my employment was filed 

"On the other hand, at the hearing held Decem- 
ber 2, 1966 (p. 23, 1.25 to p. 24, 1.10) the applicant 
testified that the first knowledge he had of the 
guarantee was in the morning on June 4, 1963, by 
reason of a telephone conversation with Collen the 
attorney who represented the claims forwarded by 



—16— 

Manufacturers Clearing House, for whom the 
appHcant appeared, including Amstan, a copy of 
which guarantee was forwarded to the applicant 
by letter dated June 5, 1963, and received June 7, 
or June 8, 1963 (the exact date not shown). (See 
Exhibits G 10 and G 10a. When Exhibit G 10 
was introduced the second page was not avail- 
able. Since that time by agreement of counsel the 
second page has been supplied and marked G 
10.). 

During the telephone conversation. Collen ad- 
vised the applicant of the Manildi guarantee and 
stated he would send a copy to Grodberg, which 
he did by letter dated June 5, 1963 (Exhibit G 
10). They also discussed the matter of fiHng an 
action against the Manildis and of attachment of 
property of the Manildis (Exhibit G 10). 

The applicant could not recall when he told the 
receiver about any levy of attachment (12-2-66 tr., 
p. 38, 1.8. to p. 40, 1.4). On June 4 (after he 
talked to Collen) the applicant told the receiver 
about the guarantee, Leonard A. Goldman, at- 
torney for the debtor being present (Goldman had 
been attorney for Manildi for about four to six 
weeks, beginning May 29 or May 31. 1963 (12-2- 
66 tr.. p. 8, 1.17 to 23). At that time the ap- 
plicant did not tell the receiver about the proposed 
attachment." 

While Appellant notes at page 6 of his Brief that 
Haldeman and Santa Monica were "related corpora- 
tions", he omits to state that both were wholly owned 
and controlled by the Manildis. [Find. 3.] Al.so. at page 
6, Appellant states that rumors arose "subsequently and 



—17— 

during the course of the Receiver's administration" that 
"other claims against Santa Monica might exist in 
favor of Haldeman" ; however, see, infra, the excerpts 
from the transcript of June 9, 1966, page 10. line 18, 
to page 11, line 2; the transcript of November 14, 1966, 
and December 2, 1966, page 45, line 14, to page 46, line 
10, which strongly support the inference that such 
"rumors" were known to Appellant even before he 
drafted the Application for his employment. 

At page 8 of his Brief, Appellant asserts that the 
Court's approval of the Plan of Arrangement "had the 
effect of relinquishing any rights the Receiver may 
have had in the real property constituting the corpus 
of the Leland Trust". However, in fact, there was a 
distinct possibility that some or even all of the real 
property would revert back to Manildi. See Appel- 
lant's own testimony, Transcript of December 2, 1966, 
pages 8 and 9, including the following portions thereof : 

1. At page 8, Hues 13 to 25. inclusive: 

"A. That would depend. If Mr. Manildi had 
the option of paying seventy-five cents on the 
dollar of the 'Guaranteed Creditors' claims before 
a year was up, under the terms of the Trust — 
then the real property would be returned to him 
— or, under the terms of the Trust, if some parcels 
could be sold within a year's period, by consent of 
all concerned, including the Receiver, if that zvere 
desired, then, if there was not enough from such 
sales to make up seventy-five cents on the dollar, 
it was anticipated that he would be given credit 
for the dividend to make up the additional amount. 
So that would depend on what facts evolved as to 
who would get the dividend." (Emphasis added.) 



—18— 

2. At page 9, line 13, to page 10, line 3, inclusive: 
"A. I would suppose so — although — no — not 
really — because — you see, this was to the benefit 
of Mr. Manildi — these dividends; in other zvords, 
he might not have to apply parts of the property 
to the Trust — suppose he were to sell off two of 
them, one of the small ones — something like that — 
and raise enough to pay sixty per cent and then, 
as was anticipated, there would be within the year 
a dividend of f if ten per cent — we had projected a 
dividend of twenty-five per cent or more — 
then that fifteen per cent would be credited toward 
the seventy-five per cent, and the property would 
be returned. 

Q. Who would get the balance of the dividend 
on the claims? Would it go back to Mr. Manildi? 
A. In effect it would because the creditors had 
settled for seventy-five cents on the dollar and he 
had been subrogated to whatever rights they had." 
(Emphasis added.) 

Also relevant is the testimony of Hubert F. Laug- 
harn. Special Counsel for the Receiver, appearing in the 
Transcript of June 9, 1966, page 35, line 16, to page 39, 
line 11, from which it is apparent that the critical time 
deadline with which said Special Counsel was faced 
when employed by the Receiver after the latter became 
aware of Appellant's conflict of interest, rendered it 
virtually impossible to effectively determine, within the 
ten (10) days allotted [p. 37, lines 20-22, incl.] whether 
steps could be taken to avoid the attachment liens on 
the Manildi s' real property, as by the filing of Involun- 
tary Petitions in Bankruptcy against them, and. at the 
same time, prepare and file the complex Complaint in 



—19— 

the Superior Court versus Santa Monica and the Manil- 
dis. [See, particularly, p. 38, Hues 4-20, incl. ; see, also, 
line 20, recognizing the possibility that a "residue" of 
the real property might revert back to the Manil- 
dis.] 

Appellant's recitation of the facts: (1) that the Re- 
ceiver's lawsuit against Santa Monica and the Manildis 
was eventually settled; and (2) that the $32,000.00 
paid to the Receiver by way of settlement, came solely 
from Santa Monica, are wholly irrelevant. Even where 
a claim, which gives rise to a conflict, is ultimately ad- 
judicated to be wholly unmeritorious, such fact does not 
alter the fact that the conflict existed, nor does it pre- 
clude disallowance of the attorney's fee under General 
Order 44. (See, e.g.: Woods v. City Nat. Bank & Sav. 
of Chicago, supra, 312 U.S. 262; In re Woodruff, 
supra, 2\ F. 2d 152.) 

It also should be noted that conspiciously absent from 
Appellant's narration of the alleged facts, is any refer- 
ence whatever to the facts set forth in the Referee's 
Finding of Fact IS, viz.: (1) that Appellant never di- 
rectly advised the Referee that he was representing an 
adverse interest; and (2) that he never made, or even 
suggested, any modification of his affidavit, or the 
Receiver's Application. 

Finally, it is again noted that Appellant cites no 
source for his statement (at p. 10 of his Brief) that 
he had "informed the receiver of this suit and attach- 
ment on several occasions prior to the meeting on Au- 
gust 19. 1963 . . .". and we are aware of no evidence 
thereof. To the contrary, see Appellant's testimony of 
June 9. 1966, supra, appearing at page 15 of the Tran- 
script of said date. 



—20— 

C. Appellant's "Summary of Argument". 

Appellant's said "Summary" assumes certain facts 
not in evidence, ignores other facts in evidence, begs 
certain issues and, generally, presents distortions of 
both fact and law. In the interests of brevity, only the 
more glaring examples will be catalogued as follows : 

1. Appellant was disqualified from representing the 
Receiver not merely because he also represented a credi- 
tor whose claim was guaranteed by the debtor's prin- 
cipals, as Appellant infers at page 12, paragraph 1, but 
because there, in fact, existed a conflict of interest ab 
initio, which Appellant knew, or should have known, 
prior to entry of the Order authorizing his employment. 

2. Appellant's assumption that the facts giving rise 
to the conflict of interest were "unknown" is not only 
unjustified, but it ignores credible evidence which 
strongly supports the inference drawn by the Referee, 
that prior to entry of the Order authorizing his em- 
ployment. Appellant knew, or should have known, (1) 
that there were possible causes of action in favor of 
the Receiver against Santa Monica and the Manildis 
(the principals of both Santa Monica and the debtor) ; 
and (2) that his contemplated suit against the Manil- 
dis, and attachment of their real property, necessarily 
conflicted with his duty to the Receiver. 

3. Clearly the facts set forth above should have 
alerted any attorney to the conflict of interest which 
actually existed, and, obviously, had they been set forth 
in either Appellant's Affidavit, or the Receiver's Appli- 
cation, it is extremely dubious that the Referee would 
have authorized Appellant's employment. Again, Ap- 
pellant's assumption that the facts, pointing to conflict, 



—21— 

were "unknown", ignores credible, if not compelling, 
evidence to the contrary. 

4. Appellant's paragraph 1, at page 13 of his Brief, 
while literally correct, borders upon absurdity since 
§44(c) obviously does not even purport to "disqualify" 
an attorney from representing fiduciaries appointed 
under the Bankruptcy Act, but merely removes the for- 
mer ipso facto disqualification where the attorney also 
represented general creditors. We hasten to add that 
the mere removal of the previous automatic disqualifica- 
tion, was not intended to sanction or permit a conflict 
of interest arising from an attorney's dual representa- 
tion of a receiver or trustee and, at the same time, a gen- 
eral creditor, as Appellant appears to suggest. 

5. Appellant's paragraph 2, page 13 of his Brief, 
merely "begs the issue", assumes that Appellant had no 
knowledge, or reason to know, of the conflict prior to 
his employment, and ignores credible evidence to the 
contrary. These observations apply equally to his para- 
graph 3. 

6. Appellant's paragraph 4 (p. 14) again ignores 
credible evidence that he knew, or should have known, 
before entry of the Order authorizing his employment, 
that a conflict existed, and blithely assumes the con- 
trary. As previously noted, the facts that the Receiver's 
lawsuit was ultimately settled, and that the funds paid 
thereunder were funds of Santa Monica is wholly im- 
material as a matter of law. 

7. While we propose to consider at a later point, Ap- 
pellant's new, and startling, assertion that he did not 
represent an adverse interest, it should be noted at this 
point that this new "argument" is contradicted at page 



—22— 

22 of his own Brief! Thus, at said page appears the 

following : 

"Had the evidence shown that appellant actually 
knew at the time he prepared his affidavit, or even 
at the time that the order authorizing his employ- 
ment was approved by the court, that the receiver 
had a cause of action to recover on behalf of the 
corporate debtor, assets which were in the posses- 
sion of the guarantors, that fact would disqualify 
appellant from acting as attorney for both the re- 
ceiver and such guaranteed creditor." (Emphasis 
added.) 

While we submit that credible evidence fully sup- 
ports the Referee's finding that Appellant knew, or 
should have known, the relevant facts respecting the 
probable conflict before he was employed by the Re- 
ceiver, the conflict, in fact, existed regardless of knowl- 
edge, and Appellant's apparent assumption that no con- 
flict exists, unless and until it is known, is a gross noii 
seqiiitur. That is. Appellant appears to suggest that a 
conflict of interest only exists where it is actually known 
by the parties. Obviously, the existence of a conflict 
and the knowledge thereof are separate and distinct, 
and an existing conflict is no less real merely because 
it may be unknown at a particular point in time. It is, 
at least, theoretically possible that a particular conflict 
might never be perceived; however, such abstract phi- 
losophizing is unnecessary here, since it is quite appar- 
ent from Appellant's previously quoted testimony that, 
at least, as of June 9. 1966, he was aware of the con- 
flict, regardless of when he acquired such awareness. 



—23— 

D. Appellant's "Questions Presented". 

Appellant's "questions" are "loaded", distorted, as- 
sume facts not in evidence, ignore facts in evidence, and 
often "beg the issue." 

1. The answer to question No. 1, page 15, obvi- 
ously is not per se, but such an attorney should bear 
in mind the possibilities of causes of action in favor 
of the estate and against the principal; hence the facts 
respecting his representation of such "guaranteed credi- 
tor" should be set forth in the attorney's affidavit. 
Furthermore, the question framed, w^holly ignores the 
existence of credible evidence which fully supports the 
Referee's finding that Appellant knew, or should have 
known, that a conflict existed before he was employed 
by the Receiver. 

2. The answer to question No. 2, page 15, is an 
unequivocal "yes", and especially so where, contrary to 
Appellant's unfounded assumption, the attorney knows, 
or should know, the facts giving rise to the conflict 
even prior to his employment. 

3. Appellant's multifaceted question No. 3 (a 
through f) is so replete with unfounded assumptions, 
so studiously ignores credible evidence contrary there- 
to, and so clearly begs the real issues, that it should be 
candidly labelled as "argument", rather than a reason- 
ably fair and honest attempt to state the issue, or issues ; 
this also disposes of question No. 4, which is wholly 
predicated upon the unfounded assumptions of ques- 
tion No. 3. 



III. 

The Finding With Respect to Appellant's Knowl- 
edge of the Probable Conflict of Interest, Is 
Supported by Substantial, if Not Compelling, 
Evidence. 

The evidence clearly supports, if it does not vir- 
tually compel, the inference, clearly and properly drawn 
by the Referee, that prior to entry of the order au- 
thorizing his employment as attorney for the Receiver, 
which occurred on June 6, 1963, Appellant knew, or 
certainly should have known, particularly in view of 
his experience, that there was a real and probable con- 
flict of interest resulting from his dual representation 
of Amstan and the Receiver, and stemming from (1) 
his duty to Amstan to acquire and preserve a lien in 
its favor on Manildi's real property, and (2) his duty 
to the Receiver to investigate and prosecute an ap- 
parent cause of action versus Manildi, based upon the 
latter's diversion of the debtor's assets to Santa Monica 
Pipe & Supply Co., and, concomitantly, to aggressive- 
ly pursue any assets of Manildi as a source of satis- 
faction of any judgment that might be obtained against 
him. This evidence is as follows : 

1. The Receiver's Application to Employ Appellant 
as Counsel [Tr. of Rec. pp. 10-12, incl], which was 
prepared by Appellant, sets forth, infer alia, the fol- 
lowing reasons or purposes for Appellant's employ- 
ment: 

"E. To examine witnesses under the provisions 
of Section 21-A (sic) of the Bankruptcy Act as 
the same may be found necessary and appropriate 
to ascertain facts and to determine if legal ac- 
tion should be taken to preserve assets of this es- 



—25— 

tate including by way of specification and not by 
way of limitation the relationships between the 
above-entitled debtor and subsidiary or connected 
corporations zvith specific reference to business 
transactions between them." (Emphasis added.) 

2. The full significance of the italicized language 
contained in the foregoing quotation, emerges more 
clearly in the light of certain testimony of Appellant, to 
be set forth hereinbelow, and also in conjunction with 
the further facts, set forth in paragraph 3 of the Ref- 
eree's Findings of Fact, pages 2, 3 [Tr. of Rec. p. 159] : 
"3. That Jack Manildi was president, a director, 
and, with his wife, the sole stockholder of the 
debtor, and he was also president, a director, and 
with his wife, the sole stockholder of a second 
corporation, Santa Monica Plumbing & Supply 
Company. That there had been extensive business 
and credit transactions between the debtor and the 
last-named corporation prior to the filing of the 
debtor's petition herein." 

As appears in the Transcript of June 9, 1966, page 
10, line 18, to page 11, line 2, Appellant testified as 
follows : 

"Now, it had been, I suppose you might say, 
generally scuttlebut-type of knowledge that it was 
well known that Santa Monica had some kind 
of connection — I won't try to define the legality 
of their arrangement — that Santa Monica and Hal- 
deman zvere interrelated in some way. As a re- 
sult, I prepared an application for the appointment 
of the accountant, Mr. Kramer, to investigate on 
behalf of Mr. Bumb the relationship between San- 



—26— 

ta Monica Pipe and Haldeman because the rumors 
had it that Santa Monica was being used, to use 
plain language, to milk Haldeman." (Emphasis 
added.) 

Further, in the combined Transcript of November 
14, 1966, and December 2, 1966, Appellant further tes- 
tified as follows on December 2, 1966. page 45, line 
14, to page 46, line 10: 

''Mr. Potts: I believe I can clarify that again. 
Q. Isn't it true, Mr. Grodberg, you first learned 
of the Manildi situation on June 4th when you 
had a telephone conversation with Mr. Collen who 
then advised you of the guarantee? A. No, 
that is not so. On the day that I filed in order 
to prepare the application for appointment of at- 
torney, the day Mr. Goldman and I came down 
here [i.e.. May 31, 1963, See same transcript, 
same page, lines 6 to 8, inclusive], then we dis- 
cussed, as we discussed in chambers with Your 
Honor, a general picture of the case, that was it. 
I asked Mr. Goldman to relate to me. to sum- 
marize to me what proposals, if any. had been 
made, so I would get an over-all picture of what 
the situation was. Undoubtedly he mentioned to 
me that there zvas a person named Jack Manildi 
who was a principal [of the] debtor, I am sure 
that must have occurred although T don't remem- 
ber any specific discussion about it. But I zvas 
made azvarc Haldeman zvas a substantial corpora- 
tion, that Manildi was its president, that he had 
a son in there who was apparently active, that 
there were a number of other persons also active 
in the corporation. He gave me some ideas zvhich 



—27— 

/ incorporated, as a matter of fact, in the applica- 
tion for appointment as the attorney for the Re- 
ceiver." (Emphasis added.) 

(See subdivision E. of the AppHcation to Employ 
Appellant as attorney for the Receiver, supra). 

In the aforesaid, combined Transcript of November 
14, 1966, and December 2, 1966, Appellant further tes- 
tified as follows, page 46, line 13, to page 48, line 11, 
inclusive : 

''The Referee: When did you learn there were 
other corporations with which Haldeman had had 
past deaHngs? 

The Witness: Mr. Goldman. 

The Referee: And what was said in that re- 
spect? 

The Witness: Well, he said there was an ac- 
count receivable in favor of Haldeman against 
Santa Monica Pipe, and, as I understood it, there 
was a proposal to settle that for $50,000 for 
which the Receiver collected $32,000. I don't 
know the details of that, but that was my under- 
standing of it. 

The Referee: This was back when? 

The Witness: May of 1963. I may be way off 
on that, but that shows the extent of my actual 
knowledge of the details of it. 

The Referee: All right, you may proceed. 

Mr. Potts: Thank you. Your Honor. 

Q. Now, Mr. Grodberg, do you have a copy of 
the application for your employment in your file? 
A. I have it in another file. 

The Referee: We will take a recess now for ten 
minutes, the reporter and I are getting tired." 



—28— 

[Whereupon, a recess was taken after which, 
all parties being present as heretofore noted, the 
proceedings were further resumed as follows] : 

"Q. [By :Mr. Potts] Do you have it. ]\Ir. Grod- 
berg? A. I do. 

Q. I would like to direct your attention to 
Paragraph E.. I wish you would read that over 
and then I would like to ask you about it, if I may. 
A. Yes. 

Q. Xow what do you mean when you are 
referring to 'and not by way of limitations the 
relationships between the above-entitled debtor and 
subsidiary or connected corporations', and so on, 
what had you reference to? A. I had ref- 
erence to the fact it was my understanding, from 
my conversation with Mr. Collen. that there was 
an account receivable in favor of Haldeman Pipe 
& Supply Company and against Santa ^Monica 
Plumbing Supply Company, which was a related 
corporation as I understood it. 

O. Why did you use the plural 'or connected 
corporations', if it was only Santa ^^lonica that 
you had in mind? Was that an oversight or a 
typographical error? A. It had no special sig- 
nificance. 

Q. You recall last time, on June 9th, yon tes- 
tified there zvas. to use your term, scuttlebut 
knowledge to the effect there zi.'as an interrelation- 
ship between Santa Monica and Haldeman. Am I 
correct, Mr. Grodhergf A. Yes. 

Q. And that, again, zi'as the information which 
yon had derived from Mr. Goldman f A. Yes." 
(Emphasis added.) 



—29— 

Clearly, all of the foregoing testimony justifies, if it 
does not, in fact, virtually compel, the inference, which 
the Referee obviously, and properly, drew, viz. : that 
before even drafting for the Receiver's signature, the 
application for Appellant's employment, Appellant must 
have known that there was a distinct possibility, if not 
probability, that Manildi, as the controUing principal 
of both corporations, had diverted assets from the debt- 
or to Santa Monica Plumbing & Supply Company, 
and, as a necessary corollary, that a cause, or causes, 
of action existed in favor of the Receiver against Ma- 
nildi. Since Appellant was requested by Collen on June 
4, 1963, to sue on Manildi's guaranty, and attach the 
latter's real property, the likelihood and dimensions of 
the conflict of interest should have been apparent to 
any attorney of even modest experience, and certainly 
to one with Appellant's previous bankruptcy practice and 
experience. 

That the Referee did, in fact, find from Appellant's 
own, foregoing testimony that the contemplated 21(a) 
examinations, as referred to in subdivision "E" of 
the Receiver's Application for Appellant's employment, 
supra, which Appellant himself prepared, included an 
examination of Manildi, is clear from the following 
language contained in the Referee's Memorandum of 
May 5, 1967, page 12 [Tr. of Rec. p. 150, lines 18- 
25. incl] : 

"Grodberg contends that item (E) relating to 
examination of witnesses under Section 21a was 
intended to apply to a $50,000 account receivable 
assertedly owing by Santa Monica Plumbing. It 
must be held thai the contemplated examinatmis 
wottld include an examination of Manildi as the 



—30— 

representative of the debtor and that such exam- 
inations properly conducted woidd inevitably lead 
to the causes of action in Case No. 825741 (by the 
Receiver versus Manildi, et al)". (Emphasis 
added.) 

In short, the Referee drew the obvious inference that 
at the time Appellant drafted the Receiver's Application 
for Appellant's employment, on May 31, 1963, Appel- 
lant contemplated, inter alia, examining Manildi relative 
to possible diversions of the debtors's assets to Santa 
Monica Plumbing and Supply Company, and hence Ap- 
pellant must have then known that there existed, at 
least, the possibility of a particularly acute conflict of 
interest arising from his representation of Amstan, and 
his impending representation of the Receiver. 

Since Appellant received instructions in the course of 
his telephone conversation with Collen (the Chicago at- 
torney for Amstan) on June 4, 1963, to immediately 
sue and attach the Manildi's real property, it appears 
inescapable that he then must have known that there 
existed a very real and acute conflict of interest arising 
from his dual representation of Amstan, and his im- 
pending representation of the Receiver. This was two 
(2) days prior to entry of the Order authorizing his 
employment as attorney for the Receiver. Certainly the 
evidence more than supports the inference drawn by the 
Referee. 

It is, of course, elementary, that the Referee's find- 
ings of fact must be accepted on both review and ap- 
peal, unless they are "clearly erroneous". (Rule 52(a), 
Fed. Rules of Civ. Procedure; Bankruptcy General Or- 
der 47; Earhart v. Callan, (9th Cir., 1955) 221 F. 2d 



—31— 

160, cert, den., 350 U.S. 829, 76 S. Ct. 59, 100 L. Ed. 
740; Gold V. Gcrson, (9th Cir., 1955) 225 F. 2d 859; 
Lines V. Falstaff Bvezving Co., (9th Cir., 1956) 233 
F. 2d 927, cert, den, 352 U.S. 893, 77 S. Ct. 129, 1 L. 
Ed. 2d 88; Hudson v. Wylie, (9th Cir., 1957) 242 F. 
2d 435, cert, den., 355 U.S. 828, 78 S. Ct. 39, 2 L. Ed. 
2d 1; Hoppe v. Rittenhouse, (9th Cir., 1960) 279 
F. 2d 3; Jue v. Bass, (9th Cir., 1962) 299 F. 2d 374; 
Englehrccht v. Bozven, (9th Cir., 1962) 300 F. 2d 891). 

It further appears settled now that the "clearly er- 
roneous" test applies even to factual inferences drawn 
from so-called "undisputed facts" {United States v. 
Gypsum Co., (1948) 333 U.S. 364, 68 S. Ct. 525, 541, 
92 L. Ed. 746; C.I.R. v. Duherstein, (1960) 363 U.S. 
278, 291, 80 S. Ct. 1190, 1200, 4 L. Ed. 2d 1218.) While 
there were decisions in the Ninth Circuit, and certain 
other circuits as well, appearing- to reflect a contrary- 
view, the Ninth Circuit, at least, has now clearly ac- 
cepted the foregoing- rule enunciated by the Supreme 
Court, as a result of its decision in Liindgren v. Free- 
man, (9th Cir., 1962) 307 F. 2d 104, noted (1963), in 
41 Tex. L. Rev. 935. In the 1967 Pocket Part to Bar- 
ron and Holtzof f , Federal Practice and Procedure, Vol. 
2B, the following appears in §1132, at pages 160. 161 
thereof : 

"§ 1132. — Inferences. 

In a major opinion, the Ninth Circuit, recogniz- 
ing the differences of view in its earlier decisions, 
has accepted the understanding of Rule 52 here 
urged. The case is Lundgren v. Freeman (cited 
in footnote No. 17.13. P. 161), in which Judge 
Duniway spoke for the court. Attributing to the 
late Judge Jerome N. Frank the view that the 



—32— 

appellate court is free to find the facts for itself 
where the evidence was written, and to Judge 
Charles E. Clark the view that the 'clearly er- 
roneous' test applies regardless of the nature of the 
evidence, the court said: 'It seems to us that the 
Clark view is favored by history. Rule 52(a) incor- 
porates the type of review that previously was had 
in equity cases . . . Nothing in the history of review 
of equity cases or of law cases tried without a jury 
suggests that the appellate court ever decides issues 
of fact in the first instance, even where it con- 
siders itself as fully qualified as the trial judge to 
do so. Rule 52(a) should be contrued to en- 
courage appeals that are based on a conviction that 
the trial court's decision has been unjust; it should 
not be construed to encourage appeals that are 
based on the hope that the appellate court will 
second-guess the trial court. Rule 52(a) ex- 
plicitely clearly applies where the trial court has 
not had an opportunity to judge the credibility of 
witnesses.' This forthright and scholarly opinion, 
if heeded elsewhere, should end any doubt as to the 
scope of review of findings of fact." 

It follows, a fortiori that the Referee's factual in- 
ferences drawn from disputed facts must be accepted 
unless "clearly erroneous". Here, the evidence is so 
clear, and the inference so compelling, that only the 
most naive and unsophisticated trier of fact could have 
failed to perceive, and draw, the obvious and com- 
pelling inference which forms the basis of the Referee's 
Finding of Fact 21 herein, viz. : 

"That on or before June 6. 1963. the date of 
entry of the Order authorizing his employment as 



—33— 

attorney for the receiver, Grodberg actually knew, 
or should have known, that his representation of 
the receiver then was, or would be, or, at least, 
might become, in substantial conflict with his rep- 
resentation of Amstan." [Tr. of Rec. p. 187.] 

It is submitted that the Referee's alternative finding 
that Appellant "should have known" of the probable 
conflict of interest, is less the result of any real doubt 
as to Appellant's knowledge thereof, than it is a mani- 
festation of an understandable reluctance to state cate- 
gorically, and with unseemly omniscience, the extent or 
state of another's "knowledge" as of a particular point 
in time, irrespective of the persuasive evidence there- 
of. It is further submitted that : ( 1 ) it was within the 
Referee's province, as trier of fact, to arrive at this 
finding, and (2) that the evidence supporting the same 
is sufficiently substantial, if not compelling, that it can- 
not be viewed as erroneous in any respect, much less 
"clearly erroneous." 

IV. 

The Principles of Law Governing the Instant Ap- 
peal Are Contained Solely in General Order 
44; Furthermore, Section 44(c) of the Bank- 
ruptcy Act Was Not Intended to, and Does 
Not, Affect in Any Manner, the Provisions of 
Said General Order. 

We have heretofore set forth verbatim the third sen- 
tence of General Order 44, which is the operative provi- 
sion governing conflicts of interest. Said General Or- 
der was promulgated by the United States Supreme 
Court on April 13, 1925, under and pursuant to the au- 
thority set forth in former §30 of the Bankruptcy Act 
(11 U.S.C. §53), which said section was repealed on 



—34— 

October 3, 1964, in connection with which, the rule mak- 
ing power was transferred to 28 U.S.C. §2075, subject, 
however, to the proviso that such repeal did not operate 
to invalidate or repeal prior rules, forms, or orders pre- 
scribed by the Supreme Court under the authority of 
§30. The final sentence of the new §2075 (28 U.S.C.) 
reads as follows : 

"All laws in conflict with such rules shall be of 

no further force or effect after such rules have 

taken effect." 

General Order 44 was amended in 1933, 1936, and 
finally in 1939, after the enactment of the Chandler 
Act of 1938. The third sentence, which governs the 
instant controversy, was added in 1933, and has been 
continued with minor changes, not material to this con- 
troversy, ever since. 

Contrary to Appellant's view that the General Orders 
are merely ancillary, procedural rules to be given but lit- 
tle weight, even some of the decisions cited by Appel- 
lant clearly recognize the substantive importance of the 
General Orders. Thus, in Matter of Hodges, (D.C., 
Conn., 1933) 4 F. Supp. 804, affirmed, sub nom., 
United Wall Papers Factory Inc. v. Hodges, (2nd Cir., 
1934) 70 F. 2d 243, cited at p. 18 of Appellant's brief, 
the Court expressly stated the following at p. 806: 

'Tt has. of course, long been established that gen- 
eral orders of the Supreme Court under authority 
of the Bankruptcy Act are to he regarded as the 
statutes, In re Brecher, 4 F. 2d 1001, 1002," 
(Emphasis Added). 

(See, also. Matter of L. M. Axle Co., (6th Cir., 
1925) 8 F. 2d 581, at p. 582). 



—35— 

Appellant's novel contention, for which absolutely no 
authority is cited, that the 1938 amendment adding 
subdivision (c) to §44 of the Bankruptcy Act (11 
U.S.C., §72(c)), somehow modifies the third sentence 
of General Order 44, has the support of neither reason 
for authority, and would certainly come as a surprise to 
the Supreme Court which revised General Order 44 in 
1939, after the 1938 addition of subdivision (c) to §44, 
for the purpose, as stated in the prefatory note to the 
General Orders in bankruptcy, as follows : 

"To conform to the many revisions of the act 
effected by the Chandler Act of 1938." 

It would violate all established canons of statutory 
construction, not to mention the most elementary prin- 
ciples of logic, to construe §44 (c) as a suh silentio re- 
peal of, or amendment to, any portion of General Order 
44. It should be noted that the decision by the Court 
of Appeals for the Ninth Circuit in the Woodruff 
case, supra, 121 F. 2d 152, was handed down after the 
1938 addition of subdivision (c) to §44, and said deci- 
sion quite obviously construes General Order 44 as 
strictly as any of the pre- 1938 decisions. 

The purpose, and the sole purpose, of the addition 
of subdivision (c) to §44 of the Bankruptcy Act was 
to remove the pre-existing fiat under which an attor- 
ney for a creditor was absolutely precluded from repre- 
senting either a Receiver or Trustee in bankruptcy. 
That Congress intended nothing more is clearly evident 
from its use of the word "merely", which Appellant so 
conveniently omitted from its purported quotation of 
§44(c), at p. 17 of his brief. As previously stated. 
Congress expressly utilized the word "merely" to em- 
phasize that an attorney representing a general creditor 



—36— 

was not to be disqualified from representing, a 
Receiver or Trustee in bankruptcy, merely by reason 
of his representation of such general creditor, and to 
further emphasize that the statute is not to be construed 
as accomplishing more than the mere removal of the pre- 
vious automatic disquahf ication. 

Since the addition of subdivision (c) to §44 of the 
Bankruptcy Act was not remotely intended by Congress 
to legitimize a conflict of interest, contrary to the clear 
provisions of General Order 44, the substantive result 
of the addition of said subsection (c) is simply this: 
although an attorney for a general creditor is now free 
to act as attorney for either a Receiver or Trustee in 
bankruptcy, the old ipso facto qualification having 
been removed, nevertheless, if he elects to do so, such 
attorney assumes the inherent risk of possible disallozv- 
ance of his fee, should it develop that a conflict of 
interest, in fact, existed, irrespective of zvhether the 
same was known or unknozmi, at the time of his em- 
ployment. 

Of course, such "inherent risk" is all the greater, 
where, as here, the creditor whom the Receiver or Trus- 
tee's attorney also represents has a guarantee by a 
principal of a corporate bankrupt or debtor, since there 
is always the definite possibility that the Receiver or 
Trustee may have a cause of action against the principal 
for a bankruptcy preference, director's preference, 
fraudulent transfer, diversion of assets, etc., and the 
more "experienced" the attorney, the greater should be 
his awareness of this fact. 

The foregoing merely underscores the importance in 
any such "high risk situation" of making a thorough 
and meticulous disclosure to the Court of all possible 



—37— 

conflicts of interest, and, specifically, all material facts 
bearing upon the attorney's relationship to, and repre- 
sentation of, a general creditor, or creditors. It is 
where, as here, the attorney fails to make the requisite 
disclosure that he is, to quote from Appellant's brief, 
playing "Russian Roulette" with respect to his fees, 
and the simple and obvious way to obviate the risks 
incident to such "Slavic speculation", is simply to dis- 
close to the Court all of the attorney's relevant connec- 
tions with the general creditor or creditors involved. 

Incidentally, Appellant's interpretation of In re Rury, 
(9th Cir., 1924) 2 F. 2d 330 (p. 19 of Appellant's 
brief) as being contrary to the pre- 1938 rule precluding 
attorneys for general creditors from representing bank- 
ruptcy Receivers or Trustees, is, at least, questionable. 
All that the Court there held was that "there is no 
necessary conflict of interest between a creditor and a 
Trustee in bankruptcy and, if the two see fit to join 
forces and employ the same attorney in an effort to re- 
cover assets, the adverse party or a stranger will not be 
heard to complain." (Emphasis Added). See, also, 
2 Collier on Bankruptcy, (14th Ed.) P4.22, p. 1680. 
See, also, p. 1681, Footnote 5, setting forth, inter alia, 
the following: 

"But an attorney for a creditor whose claim is 
under attack should not be chosen as attorney for 
the Trustee whose duty it is to make the attack. 
See Pepper v. Litton, (1939) 308 U.S. 295, 41 
Am. B.R. (N.S.) 279, 40 S. Ci. See, also. Mat- 
ter of Woodruff, (C.A. 9th, 1941) 46 Am. Br. 
(N.S.) 567, 121 F. 2d. 152, cert, den., (1941) 314 
U.S. 652, 62 S. Ct. 99, 86 L. Ed. 522, where it 
was held that attorneys for a creditor whose claim 



— 3&— 

was disputed by the Trustee should not be ap- 
pointed attorneys for what was in effect an ancil- 
lary Receiver." 

In his zeal to "construe'' the 1938 addition of subdi- 
vision (c) to §44 so as to support his position, Appel- 
lant appears to intimate that Congress thereby intended 
to "legalize" a conflict of interest arising from an at- 
torney's representation of both a general creditor, as 
well as a bankruptcy Receiver or Trustee. Not only is 
there nothing in either §44 (c) or in its legislative his- 
tory to remotely suggest any such drastic intention, but 
Congress' advised inclusion of the word "merely" ex- 
pressly negates any such drastic intent. Furthermore, 
it is a well established rule of statutory construction 
"that nothing may be read into a statute which is not 
within the manifest intention of the legislature as gath- 
ered from the act itself." (50 Am. Jur. Statutes, §229, 
p. 214; Yu Cong Eng v. Trinidad, 271 U.S. 500, 70 
L. Ed. 1059, 46 S. Ct. 619; Hoivard v. Illinois Cent. 
Ry. Co., 207 U.S. 463, 52 L. Ed. 297, 28 S. Ct. 141). 
The following, additional rule of statutory construction, 
set forth in 50 Am. Jur. Statutes, §229. p. 281, is clearly 
applicable : 

"It has even been presumed that the legislature 
intended that the statute should be construed in 
the light of settled and uniform policy of the law 
relating to the subject matter, and that there is 
no intention to depart from any established policy 
of the law. Accordingly, a purpose to effect a 
radical departure from a firmly established policy 
mill not be implied but must be expressed in clear 
and unequivocal language, and such policy is not to 
be regarded as abandoned further than the terms 



—39— 

of the statute and objects of the legislature unmis- 
takably require. Citing: inter alia, Murdoch v. 
Memphis, 20 Wall, (U.S.) 590, 22 L. Ed. 429." 
(Emphasis added). 

See, in accord, 45 Cal. Jur. 2d Statutes, §100, 
p. 614. 

Applying the foreoing rule to the instant case, it is 
submitted: (1) that it is the strong, settled, and uni- 
form policy of the law to prohibit conflicts of interest ; 
(2) that any legislative enactment, departing from 
such fundamental policy, could not be characterized 
other than as a "radical departure from a firmly estab- 
lished policy". Not only is there nothing in §44(c) 
in the nature of "clear and unequivocal language", in- 
dicating an intention to depart from the long settled and 
uniform policy of proscribing conflicts of interest, but, 
as previously noted, the inclusion of the word "merely" 
explicitly negates any intention of so doing. In fact, 
it is all but inconceivable that Congress would "in- 
ferentially" strike down the settled rule, based upon a 
centuries-old moral doctrine, which prohibits con- 
flicts of interest. It is further submitted that the fore- 
going observations are wholly consonant with the fur- 
ther rule of statutory construction, viz: "The courts 
may not, by implication, read into a statute that which 
is not intended to be there, or make an implication 
which the language of the statute does not warrant". 
(50 Am. Jur. Statutes. §242, p. 238; United States v. 
Merriam, 263 U.S. 179, 44 S. Ct. 69, 68 L. Ed. 240, 29 
A.L.R. 1547). 

While the decision in the Matter of Cal-Neva Lodge, 
Inc., (D.C.. Nev.). set forth in "Appendix A" of Ap- 
pellant's brief, is readily distinguishable from the facts 



—40— 

of the instant case, nevertheless the unfortunate dictum 
employed therein, as quoted at page 21 of Appellant's 
brief, conflicts with all rules of statutory construction, 
not to mention, common sense, if by said language 
the Honorable District Court is "construing" §44(c) 
as "legalizing" a conflict of interest. Furthermore, 
these rules of statutory construction, all of which are, 
of course, based upon logic, clearly apply, a fortiori, 
as to General Order 44, dealing as it does with funda- 
mental principles of morals and ethics, as distinguished 
from mere technical rules of law. Only the clearest and 
most unequivocal language, precluding any other logical 
interpretation, could reasonably lead to the conclusion 
that §44fc) was intended to modify General Order 44. 
and authorize a conflict of interest, as an "exception" 
to said General Rule, and the ethical concept on which 
it is predicated. Again, no such "clear and unequivocal 
language:" remotely evincing such intent, is to be 
found in §44 (c). 

V. 

The Woodruff Case Is Controlling, and the Facts 
of the Instant Case Are Manifestly Stronger 
in Support of Disallowance Than the Facts of 
Woodruff. 

Unfortunately, Appellant's "analysis" of the Wood- 
ruff case is equally as distorted as his recitation of the 
facts of the instant case. 

The facts of the Woodruff case, insofar as they re- 
late to General Order No. 44, may be briefly summar- 
ized as follows: On July 5, 1939, Woodruff filed a Vol- 
untary Petition in Bankru])tcy in the District Court for 
the Eastern District of Oklahoma, and was. on the 



—41— 

same day, adjudicated a bankrupt. On July 13, 1939, 
one M. E. Heiser filed an Involuntary Petition against 
Woodruff in the District Court of the United States 
for the Southern District of California, and, on the 
same day, the California court appointed one E. A. 
Lynch as Receiver. Thereafter, on July 20, 1939, at the 
first meeting of Woodruff's creditors, the Oklahoma 
court appointed the appellant, one P. M. Jackson, as 
Trustee in Bankruptcy, and, thereafter, on July 27, 1939, 
the California court, upon the verified petition of the 
Receiver, authorized the employment of Leonard J. Mey- 
berg and Rupert B. Turnbull. as attorneys for the Re- 
ceiver. Subsequently, on October 16, 1939, an Order 
was entered to the effect that the California case be 
transferred to the Oklahoma court for the greatest 
convenience to the parties in interest. The Oklahoma 
Trustee objected to the fee allowances of both the 
Receiver and his attorneys. With respect to the at- 
torneys, the Oklahoma Trustee asserted that their fees 
should be disallowed under General Order No. 44. for 
non-disclosure of a conflict of interest. 

After quoting General Order No. 44 verbatim, the 
majority opinion in Woodzvard held as follows : 

'Tn this case, the receiver's attorneys (Turnbull 
and Meyberg) were appointed upon a verified peti- 
tion of the receiver which, though not signed by 
Turnbull and Meyberg, was prepared by them. At 
that time and at all times here pertinent, Turnbull 
and Meyberg were attorneys for Heiser, the peti- 
tioning creditor, whose claim against the estate, 
amounting to $278,631.71, was disputed by appel- 
lant as trustee. Thus, at the time of procuring 
their appointment as attorneys for the receiver, 



—42— 

Turnbull and Meyberg represented an interest ad- 
verse to the trustee and the estate in the matter 
upon which they were to be engaged. This fact 
was well known to the receiver, but was not dis- 
closed in his petition. 

"Attached to and filed with the receiver's peti- 
tion were the affidavits of Turnbull and Meyberg, 
each stating that he was 'not employed by or con- 
nected with the bankrupt or any other person 
having an interest adverse to the receiver, trustee 
or creditor.' The fact that Turnbull and IMeyberg 
were attorneys for Heiser was not disclosed. 

"The court below found that the receiver dis- 
closed to the court that Turnbull and Meyberg were 
attorneys for Heiser, but the finding does not state 
when or how the disclosure was made. The evi- 
dence does not show that it was made at all. (Set- 
ting forth in Footnote No. 4, the following: Tt 
should here be noted that the judge who made the 
finding was not the judge who made the order 
authorizing the employment of Turnbull and IMey- 
berg as attorneys for the receiver. The order was 
made by Judge James, the finding by Judge Cos- 
grave.') It certainly was not made at the time or 
in the manner required by General Order 44. 

"The receiver's petition — written, filed and pre- 
sented to the court by Turnbull and Meyberg — did 
not in terms state that it was necessary for the re- 
ceiver to employ attorneys. It did, however, state 
that the receiver 'must have legal advice concern- 
ing his conduct'. This and other statements in 
the petition obviously were designed and intended 
to make it appear that it was necessary for the 



receiver to employ attorneys. The record discloses 
no such necessity. 

"We conclude that the appointment of Turnbull 
and Meyberg as attorneys for the receiver zvas pro- 
cured in violation of General Order 44, and that 
they are, therefore, not entitled to compensation. 
Assuming, without deciding that, in some circum- 
stances, a bankruptcy court may, in the exercise 
of its discretion, allow compensation to attorneys 
whose appointment was procured in violation of 
General Order 44, we hold that, in the circum- 
stances here shozvn, to allow such compensation 
was an abuse of discretion." (Emphasis added). 

The dissenting opinion in Woodruff graphically 
points out how and wherein the facts of the instant 
case far more strongly call for disallowance than the 
facts involved in Woodruff, e.g.: (1) in Woodruff the 
attorneys were merely attorneys for what was. in sub- 
stance, a mere ancillary receiver, who, as the dissenting 
Judge noted, was appointed "merely to conserve assets", 
and who had no duty to pass on the validity of claims; 
(2) in Woodruff, although the attorneys' representation 
of the creditor, Heiser, was not technically "disclosed" 
in their affidavits, nevertheless, it was abundantly ap- 
parent from various recorded documents, as noted by 
the dissenting Judge, as follows : 

"The record is replete with evidence of the dis- 
closure. It was on the petition of Heiser that the 
involuntary adjudication was made by the trial 
court, and the attorneys Meyberg and Turnbtdl 
signed the petition as attorneys for Heiser. Like- 
wise it was this creditor who petitioned for the ap- 



-AA— 

pointment of the receiver, and his petition is signed 
by these attorneys as counsel for Heiser. The 
order of the court appointing the receiver recites 
that it was made 'upon motion of Rupert B. Turn- 
bull, attorney for said petitioner'. Indeed, from 
first to last the record discloses on its face that 
these attorneys were counsel for Heiser, and the 
court could not but have been aware of that fact." 
(Emphasis Added). 

It is submitted that the following observations of the 
dissenting Judge render it clear that he would have 
supported disallowance on the facts of the instant case: 
"The spirit of the rule should be strictly en- 
forced, but there is no justification for a purely 
mechanical application of it. Here, although the 
disclosure was not made in the precise manner re- 
quired by the rule, there was an actual and com- 
plete disclosure of the facts. Ordinarily, it would 
be only in the petition itself that opportunity would 
be given to make the disclosure, but here the situa- 
tion was different." 

Manifestly, there was nothing in the record at the 
time of Appellant's employment to even remotely reflect 
his representation of "Amstan", nor to reflect the 
highly significant facts, known to Appellant prior to his 
employment, viz: (1) that "Amstan" held the personal 
guarantee of the principal of the Debtor; and (2) that 
there were "rumors" to the effect that the principal. 
Manildi, had caused assets of the Debtor to be diverted 
to Santa Monica, another corporation of which he was 
the dominating principal. 



—45— 

The majority opinion in the Woodruff case, insofar 
as it holds that "oral disclosure" is insufficient, is 
fully in accord with In re H. L. Stratton, Inc., (2nd 
Cir., 1931) 51 F. 2d 984, which case, if anything, re- 
sulted in an even "harsher" decision. Thus, in the 
Stratton case the attorneys were surcharged for their 
entire fee of $15,000.00, over four (4) years after 
payment of same, based upon non-disclosure of a con- 
flict of interest in their affidavit, notwithstanding that 
they had made an oral disclosure to the Judge, and, 
further, despite the fact that the Receiver's contention 
that a set-off was unlawful was ultimately held to be 
unmeritorious. With respect to the "harshness" of the 
decision, the court had the following to say : 

"However unfortunate the result may be to 
them (the attorneys), General Order No. 44 pre- 
cludes appointment of counsel except upon order of 
the court founded on such an affidavit as is pre- 
scribed. It is not enough that they believed that 
the set-off was lawful and that an investigation 
finally bore out the correctness of their conclusion 

"Although everything indicates that the attorneys 
rendered valuable services to the estate of the 
bankrupt, we are constrained to hold that they are 
barred from receiving compensation as attorneys 
for the Receiver because of failure to comply with 
General Orders Nos. 42 and 44, and Local Rules 
Nos. 4 and 11, and that they must restore to the 
Trustee the $15,000.00, which they have been 
paid. This is a drastic order, but the rides were 
made to be followed and require the results zve 
have reached.'' (Emphasis Added). 



—46— 

In the Woodruff case, as well as in Stratton, the 
Trustee's objection to the claim of the creditor repre- 
sented by the Receiver's attorneys was ultimately held 
to be unmeritorious. Hence, as previously noted, the 
fact that the Receiver's lawsuit in the instant case was 
ultimately settled by the Receiver's acceptance of funds 
from Santa Monica, as distinguished from the Manildis, 
is wholly irrelevant as a matter of law. 

In Earl Scheib, Inc. v. Superior Court, (1967) 61 
Cal. Rptr. 386, holding that the duty of an attorney to 
refrain from representing conflicting interests, con- 
tinues even after the termination of his employment by 
a former client, the court stated the following at page 

389: 

"An attorney has a constant and perpetual ren- 
dezvous with ethics. He stands as a trustee for 
his client's interests, a most sacred and confidential 
relationship. It is elementary that a conflict of 
interest between a trustee and his beneficiary is 
never permissible. As a trustee cannot maintain 
an attitude adverse to his beneficiary, so an at- 
torney may not represent claims inconsistent with 
those of his clients, or conflicting claims of two 
clients. He cannot serve two masters." 

This very case is an example of the reasons why the 
rules of ethics must be strictly enforced. Thus, as 
found by the Referee. Appellant must have known that 
a potential conflict very defintely existed, ah initio. 
However, he saw fit to take the "calculated risk", un- 
doubtedly with the thought that when the conflict be- 
came so obviously apparent that it could not be ignored, 



Appellant could then simply recommend that the Re- 
ceiver employ "other counsel", and thereby gracefully 
bow out without any adverse consequences to himself. 
Clearly, the Supreme Court promulgated General Order 
No. 44 for the precise purpose of discouraging at- 
torneys from taking precisely such "calculated risks" 
with all the potential evils attendant thereto. 

Additionally, as pointed out by the Supreme Court in 
the Woods case, supra, it is almost impossible to de- 
termine the degree of damage resulting from a conflict 
of interest after the fact, and courts should not be re- 
quired to assume such an onerous and inherently dif- 
ficult burden. 

VI. 

Appellant's Dual Representation of "Amstan" and 
the Receiver, Clearly Involved a Conflict of 
Interest. 

Appellant's belated contention that no conflict, in 
fact, existed need not overly detain us. Although Ap- 
pellant's own testimony, and excerpts from his brief, 
previously quoted, clearly recognize that a conflict ex- 
isted; nevertheless, we need not rely on Appellant's own 
"admissions". As noted in In Re Westmoreland, (D.C. 
Ga. 1967) 270 F. Supp. 408, at p. 411, the gist of a 
conflict within the meaning of Canon Six of the Canons 
of Professional Ethics of the American Bar Associa- 
tion, is as follows: 

"Within the meaning of this Canon, a lawyer 
represents conflicting interests when, in behalf of 
one client, it is his duty to contend for that which 
duty to another client requires him to oppose." 



Applying the foregoing, simple test to the instant 
facts, Appellant's duty to "Amstan" was to acquire and 
preserve a prior attachment lien on real property of the 
]\Ianildis, whereas Appellant's duty to the Receiver was 
to attempt to recover any property of the Manildis and, 
particularly, the self-same real property which, at one 
time, stood in the name of the Debtor, and which 
Manildi had caused to be transferred unto himself. A 
clearer case of conflict of interest is difficult to con- 
ceive. 

Finally, with respect to Appellant's argument that 
Special Counsel was appointed after the fact of the con- 
fHct of interest was brought to the Receiver's attention, 
with the asserted result that Appellant did not represent 
the Receiver in connection with the matter involving 
the conflict, such simplistic and self-serving argument 
ignores the fact that Appellant was employed from the 
begmning as General Counsel for the Receiver, and that 
the conflict of interest existed in acute form <at least 
from the date of his employment on June 6, 1963, to a 
date subsequent to August 19, 1963, when Special Coun- 
sel was employed. Furthermore, as noted by the Su- 
preme Court in the IVoods case, supra, it would be vir- 
tually impossible to speculate after the fact, as to what 
might have been accomplished by Appellant had he de- 
voted his efforts loyally and vigorously on behalf of 
the Receiver, particularly in light of his unique informa- 
tion to the effect that Manildi had caused assets of the 
Debtor to be diverted to himself, and to Santa Monica. 



VIL 

The Decisions Relied Upon by Appellant Are 
All Factually Distinguishable. 

Before proceeding to briefly analyze the factual dis- 
tinctions between the facts of the instant case and cer- 
tain of the decisions relied upon by Appellant, it should 
be conceded, in the interests of intellectual honesty, that 
at least one, or possibly two, of the decisions, while 
definitely distinguishable, are very possible contrary in 
philosophy to the provisions of General Order 44, the 
Supreme Court's decision in the Woods case, supra, and 
this Court's decision in the Woodruff case, supra. In 
so stating we have in mind, particularly, a case not 
cited by Appellant but which we feel compelled to bring 
to the Court's attention, namely. Fine v. Weinberg, 
(4th Cir.. 1967) 384 F. 2d 471. This case is readily 
distinguishable in that it involves fees for an attorney 
for an assignee for the benefit of creditors which, of 
course, is not governed by General Order 44, but rather 
is governed by the same equitable principle under which 
fees are allowable to an assignee for the benefit of credi- 
tors, viz. : the equitable principle that services beneficial 
to a fund brought into a bankruptcy court should be 
compensated out of the fund. (Citing, Randolph v. 
Scruggs, (1903) 190 U.S. 533; Flaxman v. Gardner, 
(9th Cir., 1966) 353 F. 2d 764). 

In Fine v. Weinberg, one Louis B. Fine, a member of 
the Norfolk law firm of Fine, Fine, Legum, Schwan & 
Fine, represented W. T. Byrns, Inc., as well as W. T. 
Byrns, individually. On June 11. 1965, he prepared an 
assignment for the benefit of creditors pursuant to 
which W. T. Byrns, Inc. assigned its assets to Andrew 
S. Fine, as assignee, the latter being a son of Louis B. 



—so- 
Fine, as well as a member of the same law firm. There- 
after, Andrew S. Fine, as assignee for the benefit of 
creditors, employed the services of his father as his at- 
torney as assignee. Another attorney was retained to 
handle a special matter not material to the fee con- 
troversy. An assignee's sale was scheduled on June 24, 
1965 ; however, one day prior thereto, several creditors 
filed an involuntary petition in bankruptcy against 
W. T. Byrns, Inc. The attorney for such creditors con- 
sented, in writing, to the assignee's sale provided the 
same be confirmed by the Bankruptcy Court. The sale 
was held and the sum of $25,840.53, constituted the 
proceeds. The Bankruptcy Court approved the sale on 
June 30, 1965. After adjudication the Trustee ap- 
parently discovered that W. T. Byrns, president and 
sole shareholder of the W. T. Byrns corporation had 
withdrawn the sum of $7,588.08 from the corporate 
bank account immediately prior to the execution of the 
assignment for the benefit of creditors, and the Bank- 
ruptcy Court thereafter entered an Order on April 27 , 
1966, directing W. T. Byrns to turn over to the Trustee 
in bankruptcy the aforesaid sum which he had with- 
drawn. The Bankruptcy Court found that there was 
insufficient time between the date of the assignment 
for the benefit of creditors and the date of the in- 
voluntary petition, within which Louis B. Fine could 
reasonably be expected to discover that Byrns had 
made the aforesaid withdrawal. The Court further 
found that when the conflict was discovered, Louis B, 
Fine and his firm withdrew as counsel for both the 
bankrupt corporation, as well as W. T. Byrns individual- 
ly. The District Court in In re W. T. Byrns, Inc., 
(D.C.. Va. 1966) 260 F. Supp. 422, disallowed any 
fee to Louis B. Fine due to the conflict of interest even 



—51— 

though the fact of the conflict was unknown until after 
the services were rendered. The Fourth Circuit re- 
versed the District Court apparently on the theory that 
''when the possibility of conflict grew into reality, he 
promptly withdrew his own, and his firm's representa- 
tion of any conflicting interest". 

While the foregoing case is readily distinguishable 
from the facts of the instant case, not only because 
General Order 44 is not involved, but, more significant- 
ly, because there, unlike the present case, the attorney 
had no knowledge of the conflict until after his serv- 
ices were completed, nevertheless, the case appears con- 
trary in philosophy, if not in fact, to both the Supreme 
Court's decision in the Woods case, supra, and this 
Court's decision in the Woodruff case, supra. It 
further represents the type of equivocation based upon 
alleged "equitable considerations" which can only lead to 
the all too rapid erosion of the ethical principal pro- 
hibiting conflicts of interest. 

In order to avoid unduly protracting this brief, the 
following are some of the factual distinctions between 
the instant case, and some of the cases cited by Ap- 
pellant : 

1. Matter of Itemlab, Inc., (B.C., N.Y. 1966) 257 
F. Supp. 764. is dinstinguishable as follows : 

(a) The attorneys whose fees are involved were 
merely employed by the Trustee as Special Coun- 
sel and for a Hmited purpose only ; 

(b) Specifically, the attorneys were employed to 
invalidate a Chattel Mortgage, which they did, suc- 
cessfully. After the Chattel Mortgage had been in- 
vaHdated, said attorneys' other client, (one, Dutch), 



—52— 

asserted a lien as to those assets covered by the in- 
validated Chattel Mortgage. Thus, as to the mat- 
ter for which they were employed by the Trustee, 
the interests of the Trustee and said attorneys' oth- 
er client, Dutch, were identical, insofar as seek- 
ing, and obtaining the Order invalidating the 
Chattel Mortgage, and the dispute arose after the 
services were rendered to the Trustee. 

While the foregoing distinctions are significant, nev- 
ertheless, candor requires the concession that this case 
also is philosophically contrary to the decisions in Woods 
and Woodruff, supra. 

2. Matter of Cal-Ncra Lodge, Inc., (D.C.. Nev. 
1967) set forth in Appendix A to Appellant's brief, 
is distinguishable as follows : 

(a) There was, in fact, no conflict of interest 
as between the stockholder, Adler, and the cor- 
porate debtor in possession, inasmuch as Adler had 
subordinated all of his claims against the corpora- 
tion to those of all other corporate creditors. Ac- 
cordingly, the attorneys' representation of both the 
corporate debtor and the principal stockholder. Ad- 
ler, did not result in any conflict of interest. 

3. Chicago & West Tozvn's Railway v. Friedman, 
(7th Cir., 1956) 230 F. 2d 364, is distinguishable as 
follows : 

(a) This was a Cliapter X corporate reorgan- 
ization proceeding as to which General Order 44 
is inapplicable since it is limited to attorneys rep- 
resenting Receivers, Trustess, or Debtors in Pos- 
session. Instead, the case was governed by §242 
of the Bankruptcy Act (11 U.S.C. §642) 



—53— 

(b) Perhaps more importantly, no conflict ex- 
isted at the inception of the case nor for a number 
of years thereafter. Approximately six years after 
the case was filed, during which time the attorneys 
involved represented the Creditors' Committee, 
said attorneys, on behalf of an outside client, sub- 
mitted an offer to purchase the majority of the 
debtor corporation railway's common stock. The 
Court granted the attorneys the reasonable value 
of their services rendered up to the time that their 
client submitted their purchase offer. 

In contrast, in the instance case, not only did the 
conflict actually exist from the inception of the case, 
but Appellant knew, or should have known, of its ex- 
istence, as properly found by the Referee. 

4. In In re Philadelphia & W. Ry. Co., (D.C., 
Pa. 1947) 73 F. Supp. 169, the following are distin- 
guishable facts : 

(a) This, again, was a Chapter X corporate 
reorganization in which General Order 44 is in- 
applicable ; 

(b) Perhaps most significantly, there was, in 
fact, no conflict of interest, and the Court dis- 
tinguished the case from the Supreme Court's deci- 
sion in the Woods case, supra, on the basis that in 
Woods there was, from the very beginning, an ex- 
isting conflict between the indenture trustee and 
the bondholder committee, both of whom were rep- 
resented by the same counsel. In contrast, in the 
Philadelphia case no conflict, in fact, ever devel- 
oped, and as the Court stated at page 173 : 

"There is nothing in the opinion in the Wood 
case to suggest that where no actual conflict of 



interest is shown to exist, the mere fact of 
representation of both indenture trustee and 
bondholder requires that compensation be de- 
nied." 

Here again, in the instant case, as in the Woods 
case, an actual conflict in fact existed at all times from 
and after the inception of the proceeding, and, in addi- 
tion thereto, the fact of the conflict was known by, or 
should have been known to, Appellant. 

It is submitted, by way of final summation, that the 
facts of the instant case far more strongly require dis- 
allowance than do the facts of any of the other decisions 
cited by either party to this controversy, and that al- 
lowance of Appellant's fee, in the face of the facts of 
the case, would require overruling the Woodruff case, 
and the reduction of General Order 44 to a meaningless 
succession of hollow words. 

Conclusion. 

It is respectfully submitted that the respective Orders 
of the Referee and the District Court below be affirmed 
for all of the reasons hereinabove stated. 

Respectfully submitted, 

Joseph S. Potts, 

Attorney for Appellee. 



Certificate. 

I certify that, in connection witli the preparation of 
this brief, I have examined Rules 18, 19 and 39 of the 
United States Court of Appeals for the Ninth Circuit, 
and that, in my opinion, the foregoing brief is in full 
compliance with those rules. 

Joseph S. Potts 



EXHIBIT A. 

Findings of Fact and Conclusions of Law. 

United States District Court, Central District of 
California. 

In the Matter of Haldeman Pipe & Supply Com- 
pany, a California corporation, Debtor, No. 156,434-CC. 

Filed June 15, 1967. 

The present matter arises out of an Application for 
Compensation filed herein on or about May 6, 1966, 
by Haskell H. Grodberg, hereinafter referred to as 
"Grodberg", wherein said applicant prayed for an al- 
lowance of fees in the amount of $15,500.00, for serv- 
ices rendered by him as attorney for A. J. Bumb, re- 
ceiver of the above-entitled estate. That on June 3, 
1966, the undersigned Referee in Bankruptcy, to whom 
the proceeding had been duly referred, and before 
whom all matters had been conducted, noticed a hear- 
ing for June 9, 1966, for purposes of receiving further 
evidence with respect to the aforementioned application 
of Grodberg for compensation. 

Subsequent to the hearing of June 9, 1966, and on 
or about August 1, 1966, the undersigned caused to be 
filed and served his proposed Findings of Fact, Con- 
clusions of Law, and an Order with respect to Grod- 
berg's Application for Compensation. Thereafter, and 
pursuant to a written request therefor filed on behalf 
of Grodberg, further hearings thereon were conducted 
on November 14, 1966, December 2, 1966, and De- 
cember 8, 1966, at all of which said hearings Grod- 
berg appeared by his attorneys, Beardsley, Hufstedler 
& Kemble, by Charles E. Beardsley, Seth M. Hufsted- 



■— 2— 

ler, and Stephen R. Farrand, and the receiver, A. J. 
Bumb, appearing by his Special Counsel, Joseph S. 
Potts, and evidence both oral and documentary having 
been introduced, and the court having taken the mat- 
ter under submission, and having further considered 
proposed Findings of Fact and Conclusions of Law 
submitted by both counsel for Grodberg and the re- 
ceiver, on behalf of their respective clients, and good 
cause appearing therefor, the court hereby makes the 
following : 

FINDINGS OF FACT 

1. That the above-entitled proceeding was com- 
menced on May 31, 1963. by the debtor's filing of a 
Petition for an Arrangement under the provisions of 
§322 of the Bankruptcy Act (11 U.S.C. §722). 

2. That prior thereto, and on May 24, 1963, a 
meeting of the debtor's larger creditors was held, which 
was attended, among others, by one William Collen, 
hereinafter referred to as "Collen," of Collen, Kessler 
& Kadison, attorneys with offices in Chicago, Illi- 
nois, representing Manufacturers' Clearing House, for- 
warders of certain claims of creditors of the debtor, 
including the claim of American Radiator & Standard 
Sanitary Corporation, hereinafter referred to as "Am- 
stan," for purposes of brevity; that Amstan then had 
a claim against the debtor in the sum of approximately 
$120,000.00, of which $100,000.00 had been person- 
ally guaranteed by Jack Manildi and his wife, Vina 
Gale Manildi. 

3. That Jack Manildi was president, a director, and, 
with his wife, the sole stockholder of the debtor, and 
he was also president, a director, and, with his wife. 



— 3— 

the sole stockholder of a second corporation, Santa Mon- 
ica Plumbing & Supply Company. That there had 
been extensive business and credit transactions between 
the debtor and the last-named corporation prior to the 
filing of the debtor's petition herein. 

4. That on May 28, 1963, Grodberg was contacted 
by telephone from Chicago, by Collen, who advised 
Grodberg that the debtor was reported to be consider- 
ing filing a Petition for an Arrangement under Chap- 
ter XI of the Bankruptcy Act, and Collen requested 
Grodberg to represent those creditors who were rep- 
resented by Cohen's law firm, and to contact the debt- 
or's attorney, Leonard A. Goldman, hereinafter re- 
ferred to as "Goldman," for further details. That Grod- 
berg agreed to Cohen's requests, and thereafter con- 
tacted Goldman relative to the debtor's situation and 
intentions. 

5. That on May 31, 1963, Goldman filed the debt- 
or's Petition under Chapter XI, and immediately there- 
after on the same day, in the presence of Grodberg, 
requested the undersigned Referee in Bankruptcy, to 
whom the proceeding had just been referred, to ap- 
point a Receiver. That on said date, A. J. Bumb was 
appointed receiver, qualified on the same day, and has 
ever since been, and still is, the duly appointed, quali- 
fied and acting receiver of the above-entitled debtor's 
estate. 

6. That subsequently, on May 31, 1963, at the re- 
ceiver's request, Grodberg prepared an Application, for 
the signature of the receiver, for an order authorizing 
the receiver to employ Grodberg as his attorney, as 
well as an Affidavit, signed and sworn to by Grodberg, 



which Affidavit recites, among other things, the fol- 
lowing : 

". . .; that affiant represents certain unsecured 
creditors whose interests, so far as known to af- 
fiant, are identical to those of the receiver herein; 
that affiant does not represent any interest which 
is adverse to the receiver or to the creditors here- 
in. . . ." 

That the aforesaid Application, prepared by Grod- 
berg for the receiver's signature, states, among other 
things, that Grodberg "is duly qualified and expe- 
rienced in bankruptcy matters such as are involved in 
the administration of this estate." The order of em- 
ployment, filed June 6, 1963, also prepared by Grod- 
berg, recites that Grodberg was employed for the spe- 
cial and general purposes set out in the application of 
the receiver, which application, among other things, 
contains the following reasons or purposes for his 
employment : 

"E. To examine witnesses under the provisions 
of Section 21-A(sic) of the Bankruptcy Act as 
the same may be found necessary or appropriate 
to ascertain facts and to determine if legal action 
should be taken to preserve assets of this estate 
including by way of specification and not by way 
of limitation the relationships between the above- 
entitled debtor and sitbsidiary or connected cor- 
porations with specific reference to business trans- 
actions between them. (Emphasis added.) 

"F. To advise and assist applicant in the col- 
lection of accounts receivable and all other money, 
funds and property due and owing to the debtor 
as the same may be found necessary. 



"G. To prepare on behalf of applicant neces- 
sary legal applications, answers, orders, reports 
and other papers. 

"H. To confer with the Receiver rendering le- 
gal advice, and in general to render such other le- 
gal services as are usually rendered by attorneys 
for receivers in like proceedings." 

7. Neither the affidavit nor the application makes 
any reference to the fact that Grodberg represented 
Amstan, or that Amstan was the holder of a guaran- 
tee from the Manildis to the extent of $100,000, or 
that Alanildi was the president of the debtor, or that 
Manildi was a principal of Santa Monica Plumb- 
ing Supply Company, a debtor of Haldeman; or that 
Amstan (Collen) and Grodberg had discussed the mat- 
ter of a suit against Alanildi and of levies of attach- 
ment against his property. Each of these matters was 
known by Grodberg on June 4, 1963; and each of the 
matters, excepting possibly as to the guarantee, and 
the proposed suit and attachment were known on May 
31, 1963. the date of the preparation by Grodberg 
of the application. 

8. That subsequent to Grodberg's mailing to the 
receiver of the aforesaid Application for an order au- 
thorizing the receiver to employ Grodberg, and prior 
to June 6, 1963, the date on which the order was en- 
tered authorizing his employment as attorney for the 
receiver, Grodberg received a second telephone call from 
Collen in Chicago, on June 4, 1963, in the course of 
which Collen informed Grodberg that Amstan held per- 
sonal guarantees of ]\Ir. and Mrs. Manildi of the debt- 
or's obligations to Amstan to the extent of $100,000.00, 



-6— 

and Collen further requested Grodberg to file an ac- 
tion thereon at the earHest possible moment and in 
connection therewith to promptly levy attachments on 
certain parcels of real property standing in the names 
of the Manildis, and Collen further explained to Grod- 
berg that the urgency of an immediate attachment 
stemmed from the facts (1) that certain other cred- 
itors of the debtor also held personal guarantees of the 
Manildis, and (2) that one creditor, Alabama Pipe 
Company, had already attached parcels of real proper- 
ty owned by the Manildis. 

9. That on the following day, June 5, 1963, Collen 
forwarded a letter to Grodberg transmitting copies of 
the Manildi's guarantees of the debtor's obligations to 
Amstan, in which letter Collen reiterated the urgency 
of a prompt suit and attachment. That Grodberg re- 
ceived CoUen's said letter on or before June 8, 1963, 
on which date he drafted a complaint against the 
Manildis and prepared the documents necessary to ef- 
fectuate an attachment on their real property. That the 
aforesaid complaint was filed on June 10, 1963, and 
the levies of attachment were made shortly thereafter. 

10. That at least some of the real property upon 
which Grodberg caused attachments to be levied was 
subsequently sought to be recovered by the receiver in 
his Superior Court Action No. 825,741, referred to in 
greater detail hereinbelow. 

11. That also on June 4, 1963, after his telephone 
conversation with Collen, referred to in Paragraph 8 
hereinabove, Grodberg mentioned in the presence of 
Goldman and the receiver, following a meeting at the 
Bank of America, that one of the creditors he repre- 



— 7— 

sented held a personal guaranty executed by the Manil- 
dis; however, Grodberg said nothing to indicate that 
the receiver had any cause of action, or possible cause 
of action, against Mr. or Mrs. Manildi, or Santa Moni- 
ca Plumbing & Supply Co., and Grodberg likewise 
did not inform the receiver that he then intended to 
file a lawsuit on behalf of Amstan against the Ma- 
nildis, based upon their guaranty, and also intended to 
attach certain real property standing in the names of 
the Manildis in connection therewith. 

12. That shortly prior to July 26, 1963, Goldberg, 
acting as attorney for the receiver, prepared an Appli- 
cation, which was signed by the receiver on the last men- 
tioned date, in which Application there was sought au- 
thority to employ an auditor, among other reasons, to 
investigate transfers of real property and other assets 
of the debtor to Manildi and to Santa Monica Plumb- 
ing & Supply Co. That on or about July 29, 1963, an 
Order was entered based on said Application, author- 
izing the receiver's employment of one Albert 
Kramer, hereinafter referred to as "Kramer", a Public 
Accountant, for purposes of conducting the examina- 
tions and auditing work referred to in the receiver's 
Application. 

13. That on August 19, 1963, in the course of a 
conference attended by the receiver, Grodberg, Kramer, 
and Hubert F. Laugharn, hereinafter referred to as 
''Laugharn", attorney for the creditors' committee, 
Kramer orally reported that, in his opinion, there were 
possible causes of action in favor of the receiver against 
the Minildis and Santa Monica Plumbing & Supply 
Co., based upon allegedly improper transfers or diver- 
sions of assets and real property of the debtor to said 



potential defendants. At this time, Grodberg notified 
the receiver for the first time, that, as attorney for 
Amstan, he had sued the Manildis and attached real 
property standing in their names, and Grodberg further 
suggested that the receiver should employ other counsel 
to handle any claims or litigation on behalf of the re- 
ceiver as against the Manildis or Santa Monica Plumb- 
ing & Supply Co. 

14. Thereafter, and on or about August 30, 1963, 
the receiver employed Laugharn as Special Counsel to 
prepare and prosecute various causes of action against 
the Manildis and Santa Monica Plumbing & Supply Co. 
That on September 23, 1963, Laugharn filed, on the 
receiver's behalf, Los Angeles Superior Court Action 
No. 825,741, against Jack ]\Ianildi, A^ina Gale Manildi, 
and Santa Monica Plumbing & Supply Co. Ultimately, 
this litigation was settled and compromised, pursuant 
to which the sum of $32,000.00 was paid to the re- 
ceiver out of the proceeds of sale of the assets of Santa 
Monica Plumbing & Supply Co. 

15. That, although Grodberg obliquely mentioned 
that he represented a "guarantee" creditor during the 
course of one of several hearings in connection with 
the first meeting of creditors, the original of which was 
held on July 9, 1963, and although he further re- 
ferred to the "Leland Trust" in favor of the "guar- 
antee" creditors, in open court on September 3, 1963, 
nevertheless, he at no time made a direct statement to 
the court that he was representing an interest adverse 
to the receiver and the body of creditors generally, and 
the first time he suggested such possibility to the re- 
ceiver was only after Kramer's oral report of August 
19, 1963. That Grodberg never made, or even sug- 



— 9— 

gested, any modification of his Affidavit, or the re- 
ceiver's application. 

16. That to avoid or minimize a "panic situation" 
affecting those creditors of the debtor holding personal 
guarantees of the Manildis, and to obviate a "race" as 
between them to first obtain attachment or execution 
liens on the Manildi's real property, negotiations were 
commenced in the latter part of June, 1963, between the 
several attorneys representing such "guarantee" credi- 
tors, including Grodberg, as attorney for Amstan, and 
Manildi and his personal attorney, William J. Tiernan. 
As a culmination of these negotiations there was created 
a guarantee creditors' trust, referred to as the "Leland 
Trust", pursuant to which it was provided that the 
"guarantee" creditors were to share proportionally to 
the extent of fifty per cent (50%) of their respective 
claims, without interest, in the proceedings of sale of 
the Manildi 's real property, which had previously been 
attached by some or all of the "guarantee" creditors, 
and which said real property constituted the trust cor- 
pus. Said trust further provided that the "guarantee" 
creditors were further to receive an additional sum, not 
to exceed twenty-five per cent (25%). of their re- 
spective claims, in the form of dividends payable out 
of the debtor's estate herein, subject to the further 
proviso that any surplus over the aforementioned per- 
centages, which might be received by the "guarantee" 
creditors, would be paid by them to the Manildis, who 
were also to be thereby released from any further liabil- 
ity under their guarantees. 

17. That the provisions of the aforesaid "Leland 
Trust" were recognized and approved by the Order of 
September 27, 1963, confirming the debtor's plan of 



—10— 

arrangement. Said Order further reserved to the re- 
ceiver all rights as against the Minildis and Santa 
Monica Plumbing & Supply Co. theretofore asserted in 
Los Angeles Superior Court Action No. 825,741. 

18. That Grodberg received a total of $8,650.00 
from Amstan for legal services rendered in connection 
with the suit he filed on its behalf against the INlanil- 
dis, and the concommitant attachments of the latters' 
real property, and in participating on Amstan's behalf, 
in the negotiations culminating in the creation of the 
"Leland Trust". 

19. That during the course of his representation 
of the receiver herein, Grodberg performed legal serv- 
ices, not involving matters relating to the Manildis, 
Santa Monica Plumbing & Supply Co., or other mat- 
ters asserted in connection with Los Angeles Superior 
Court Action No. 825,741, for which he claims com- 
pensation in the amount of $15,500.00, the fair and 
reasonable value for which the Court finds is in the 
sum of $12,500.00. 

20. That on May 31, 1963. at which time Grod- 
berg prepared his Affidavit and the Application and 
Order authorizing his employment as attorney for the 
receiver herein, there was, in fact, an actual, if not 
yet known, conflict of interest as between the receiver, 
on the one hand, and Amstan. on the other hand. 

21. That on or before June 6, 1963, the date of en- 
try of the Order authorizing his employment as attor- 
ney for the receiver, Grodberg actually knew, or should 
have known, that his representation of the receiver 
then was, or would be, or, at least, might become, in 
substantial conflict with his representation of Amstan. 



—11— 

22. That Grodberg-'s representation of Amstan, in 
connection with which he sought to recover from the 
Manildis, was in substantial confHct with the receiver's 
possible rights to recovery from the Manildis. 

23. That Amstan's levy of attachment on real prop- 
erty standing in the names of the Manildis reduced, and 
militated against, the receiver's ability to effect collec- 
tion of any claim or cause of action he may have had 
against the Manildis. 

24. That Grodberg's representation of Amstan ren- 
dered it improbable that he would advise the receiver 
that an involuntary petition in bankruptcy against the 
Manildis should be considered, and, if possible, filed, 
so as to avoid the various attachments levied by the 
"guarantee" creditors, including Amstan, on real prop- 
erty standing in the names of the Manildis. 

25. That Grodberg's representation of Amstan fur- 
ther rendered it improbable that he would effectively 
advise the receiver in relation to any possible course of 
action which might conflict with, or impede, the prior 
and secured position of Amstan in relation to the Ma- 
nildi real propert3^ or otherwise. 

From the foregoing Findings of Fact, the Court 
hereby makes the following : 

CONCLUSIONS OF LAW 

1. That on May 31, 1963, at which time Grod- 
berg prepared his Affidavit and the Application and 
Order authorizing his employment as attorney for the 
receiver herein, there was, in fact, an actual, if not 
yet known, conflict of interest as between the receiv- 
er, on the one hand, and Amstan, on the other hand. 



—12— 

2. That on or before June 6, 1963, the date of en- 
try of the Order authorizing his employment as at- 
torney for the receiver, Grodberg actually knew, or 
should have known, that his representation of the re- 
ceiver then was, or would be, or, at least, might be- 
come, in substantial conflict with his representation of 
Amstan. 

3. That Grodberg's representation of Amstan, in 
connection with which he sought to recover from the 
Manildis, was in substantial conflict with the receiv- 
er's possible rights to recovery from the Manildis. 

4. That Amstan's levy of attachment on real prop- 
erty standing in the names of the ^Manildis reduced, 
and militated against, the receiver's ability to effect 
collection of any claim or cause of action he may have 
had against the Manildis. 

5. That Grodberg's original, and continuing, failure 
to set out in his Affidavit the facts respecting his 
representation of Amstan, its claims against the Ma- 
nildis. and the relationships between the ^lanildis, San- 
ta Monica Plumbing & Supply Co. and the debtor, 
constitutes a substantial violation of. and non-compli- 
ance with, the provisions of General Order 44 (11 
U.S.C. following §53), which requires disallowance of 
any compensation to which he might otherwise be en- 
titled as attorney for the receiver herein. 

Dated: This 15 day of June, 1967. 

/s/ RUSSELL B. SEY^IOUR 
Russell B. Seymour 
Referee in Bankruptcy 



No. 22537 
IN THE 

United States Court of Appeals 

FOR THE NINTH CIRCUIT 

AUC 

In the Matter of 

Haldeman Pipe & Supply Company, a corporation, 

Debtor. 



On Appeal From the United States District Court for the 
Central District of California. 



APPELLANT'S REPLY BRIEF. 



Beardsley, Hufstedler & Kemble, 
By Seth M. Hufstedler, 

458 South Spring Street, FILED 

Los Angeles, CaHf. 90013, 

Attorneys for Appellant, ^yg g 1958 

Haskell H. Grodberg. 

WM. BJ.UCK, QLEkh 



Parker & Son, Inc., Law Printers, Los Angeles. Phone MA. 6-9171. 



TOPICAL INDEX 

Page 
I. 

There Is No Finding of Fact That Appellant Knew 
of a Possible Suit by the Receiver Against Ma- 
nildi, Upon the Filing of His Affidavit for Em- 
ployment by the Receiver 1 

1. Appellee's Brief Erroneously Suggests That 
Appellant Was Found to Have Knowledge of 
a Possible Cause of Action Against Mr. or 
Mrs. Manildi at the Time of Filing the Affi- 
davit in Conjunction With His Employment 

1 

2. Findings of Fact Cannot Be "Inferred" 
Either From Other Findings of Fact or From 
Conclusions of Law as Urged by Appellee .— 6 

3. All "Credible Evidence" Supports the Ref- 
eree's Position in Refusing to Find Knowl- 
edge on the Part of Appellant of a Possible 
Suit by the Receiver Against Manildi When 
Appellant Was Appointed Attorney for the 
Receiver 7 

IL 
In Failing to Decide on the Basis of Actual Con- 
flict, and Instead Deciding the Case on the Basis 
of a Possible Conflict, the Referee and the Dis- 
trict Court Held Contrary to Statute, Rule and 
Precedent 13 

1. An Attorney's Representation of More Than 
One Creditor Against the Same Debtor Does 
Not Ipso Facto Mean That He Is Represent- 
ing at the Same Time Conflicting Interests 
13 



III. Page 

In Declaring a Forfeiture by Appellant of All Fees 
Earned as the Receiver's Attorney in Unrelated 
Matters in This Estate, the Lower Court Abused 
Any Discretion It May Have Had Under 
General Order 44, and the Cases Cited by the Ap- 
pellee Are Clearly Distinguishable 18 

Conclusion 25 



TABLE OF AUTHORITIES CITED 

Cases Page 

Albers v. Dickinson, 127 F. 2d 957 19, 21 

Barceloux, In re, 74 F. 2d 288 18 

Crites, Inc. v. Prudential Ins. Co., 134 F. 2d 925 .. 22 

Eureka Upholstering Co., Inc., Matter of, 48 F. 2d 
95 21 

Fine v. Weinberg, 384 F. 2d 471 15, 16, 17 

ItemLab, In the Matter of, 257 F. Supp. 764 ....14, 22 

Lundgren v. Freeman, 307 F. 2d 104 6 

Official Creditor's Committee v. Ely, 337 F. 2d 
461 6 

Stratton v. New, 51 F. 2d 984 19, 20 

W. T. Byrns, Inc., In re, 260 F. Supp. 242 ..15, 16, 17 

Weil V. Neary, 278 U.S. 160, 49 S. Ct. 144, 73 L. 
Ed. 243 19, 21, 22 

Westmoreland, In re, 270 F. Supp. 408 20 

Woodruff, In re, 121 F. 2d 152 21 

Woods V. City Nat'l. Bank & Savings of Chicago, 
312 U.S. 262, 61 S. Ct. 493, 85 L. Ed. 820 21 

Rules 

Rules of Court, Rule 4 20 

Statutes 

Bankruptcy Act, Sec. 44 20, 24 

Bankruptcy Act, Sec. 62(d) 18, 19, 21 

Textbooks 

2 Collier on Bankruptcy, p. 1686 22 

3A Collier on Bankruptcy, p. 1471 19, 20 



No. 22537 
IN THE 



United States Court of Appeals 

FOR THE NINTH CIRCUIT 



In the Matter of 

Haldeman Pipe & Supply Company, a corporation, 

Debtor. 



On Appeal From the United States District Court for the 
Central District of California. 



APPELLANT'S REPLY BRIEF. 



I. 
There Is No Finding of Fact That Appellant Knew 
of a Possible Suit by the Receiver Against 
Manildi, Upon the Filing of His Affidavit for 
Employment by the Receiver. 

1. Appellee's Brief Erroneously Suggests That Appellant 
Was Found to Have Knowledge of a Possible Cause of 
Action Against Mr. or Mrs. Manildi at the Time of 
Filing the Affidavit in Conjunction With His Employ- 
ment. 

An examination of the two briefs previously filed 
herein show that the parties are in agreement on at least 
(and almost only) one thing: it is a matter of major 
importance whether or not appellant knew (or was in a 
position to be charged with knowledge) that the re- 
ceiver might have a cause of action against Mr. and 
Mrs. Manildi. 



Appellee is so flat-footedly positive in his repetition 
of the proposition that one's suspicion is immediately 
aroused as to its accuracy. At pages 20 and 21 of his 
brief, his answer to virtually every argument of appel- 
lant is that he "knew or should have known" that there 
existed a "conflict of interest ab initio" (see paragraphs 
1, 2, 3, 5 and 6.) More specifically, on page 20 (para- 
graph 2) he states precisely what he means : "Appellant 
knew, or should have known, (1) that there were pos- 
sible causes of action in favor of the Receiver against 
Santa Monica and the Manildis. . . ." 

We agree with appellee that such a finding is critical 
to his case. Mere repetition, however, will not prove 
his point. 

The Referee was much more limited in his findings. 
He found that on May 31, 1963, "There was in fact, an 
actual, if not yet known, conflict of interest between 
the receiver, on the one hand, and Amstan, on the other" 
[Concl. of Law, 1 and Find. 20; emphasis added.] 

Clearly, then, the Referee did not find that appellant 
knew of an actual conflict. To the contrary, he recog- 
nizes that it might not be known. 

The Referee spelled out what he meant in the next 
finding and conclusion : 

"[0]n or before June 6, 1963 . . ., Grodberg 
actually knew, or should have known, that his 
representation of the receiver was then, or would 
he, or at least might become, in substantial conflict 
with his representation of Amstan." [Find. 21; 
Concl. 2 ; emphasis added. ] 

Thus one of the possible alternative findings (which 
must justify the order or it is invahd) is that on June 
6, 1963, Appellant should have known that his repre- 
sentation of the Receiver might become in conflict with 
his representation of Amstan. 



— 3— 

As the Opening Brief shows, General Order 44 now 
contemplates that an attorney may represent a receiver 
even though he represents a creditor, and the interests 
of the parties "might become" in conflict, as, for ex- 
ample, where the claim of the creditor is challenged or 
reexamined. 

Furthermore, all of the Appellee's assertions about 
the status of knowledge of Appellant regarding a claim 
against Manildi are only that : assertions by appellee, not 
findings by the Referee. The Referee made it quite 
clear as to what he found. He said appellant knew 
these things on June 4, 1963 : 

1. Grodberg represented Amstan ; 

2. Amstan held a guarantee from the Manildis up 
to $100,000.00. 

3. Manildi was president of debtor ; 

4. Manildi was "a principal of Santa Monica". 

5. Amstan and Grodberg had discussed a suit by 

Amstan against Manildi and levies of attach- 
ment against his property. [Find. 7.] 

The missing link, supplied only by unsupported 
repetition and italics by appellee is that appellant should 
have anticipated wrongdoing by Manildi solely because 
he was "president" of debtor and "a principal" of Santa 
Monica, and that the wrongdoing was such that it 
would give the debtor (and hence the Receiver) an ulti- 
mate right to levy on Manildi's property. 

The Referee clearly avoided making any such finding, 
and there are no facts in the record to support such 
speculation. 

On the contrary, Mr. Leonard Goldman, the attorney 
for the debtor and Manildi flatly declared : 

"For the record, there could not have been, in 
my opinion, the possibility of any outward ap- 
pearance of any adversity." [Rep. Tr., June 9, 
1966, p. 39, lines 21-23.] 



Furthermore, the record shows that the Referee did 
not intend to find that Appellant knew that there might 
be a cause of action against Manildi. Thus, the Referee 
specifically states 

"the point I am trying to get at is, what is the ef- 
fect of representing . . . let's assume for the 
moment ... of in fact representing an adverse in- 
terest even though )^ou might not know about it? 
That is what I am getting at." [Rep. Tr., June 9, 
1966, p. 41, lines 12-15.] 

Again, on this subject, the Referee stated : 

"... I think that every intendment should 
be used, not in favor of the person who at one 
time or another discovers he has an adverse in- 
terest undisclosed to the court, but it should be 
pursued in the other direction, and I am talking 
now of the situation today, the order au- 
thorizing the employment is filed and there is an 
affidavit T represent no adverse interest'. And 
two months from now, or three months from now, 
or some other time it develops as a matter of fact. 
Now, don't misunderstand; I am not suggesting 
a matter of knowledge in the inception, but as a 
matter of fact he does represent adverse interests." 
[Emphasis supplied; Rep. Tr., June 9, 1966, p. 31, 
lines 4-18.] 

Consistent with the foregoing preliminary comments, 
in making his specific Findings of Fact on the subject 
of appellant's knowledge, the Court significantly did not 
find that Appellant had any knowledge of the possi- 
bility of a suit by the Receiver against Manildi on the 
critical dates of May 31, 1963 and June 4, 1963. [All 
of the specific Findings as respect appellant's knowledge 
in this regard are set forth in the last sentence of Find. 
7, discussed above.] 



— 5— 

With respect to the "knowledge" aspect of the matter, 
General Order 44 is clear. It does not ask the impos- 
sible. It simply requires the verified petition for ap- 
pointment of an attorney for a receiver to set forth the 
attorney's specified connections "to the best of peti- 
tioner's knowledge". It does not demand that such 
petition or affidavit set forth what the applicant 
"should have known" or what "would be, or, at least, 
might become", in the future, but which the Referee 
apparently requires by Conclusion 2, 

It, therefore, is submitted that in the first place, the 
Finding of Fact actually made with respect to appel- 
lant's knowledge, to wit, Finding of Fact 7 referred 
to above, does not support any Conclusion of Law that 
there was any knowledge of any actual conflict, in view 
of the fact that there is no Finding of the existence of 
an indispensable element requisite to the alleged conflict 
envisaged, namely, knowledge of the existence of a 
suit in favor of the Receiver and purportedly in conflict 
with a suit in favor of Amstan against the same third 
party. On the contrary, by the omission of such a 
Finding of Fact, such alleged knowledge must be deemed 
found not to have existed. 

Furthermore, not only is said Conclusion of Law 2 
unsupported by the Findings of Fact, but said Conclu- 
sion by holding that Appellant "should have knoznm that 
his representation of the Receiver then was, or would 
be, or, at least, might become, in substantial conflict 
with his representation of Amstan" goes far beyond 
the express and limited provisions of General Order 44. 
It engrafts upon the first sentence of General Order 
44 requirements not merely of what was actually known 
"to the best of petitioner's knowledge", but requires 
sheer speculation as to what one "should have known" 
as to "what would be, or, at least, might become" in 
the future. 



Finding of Fact No. 7 significantly omits any Find- 
ing of any knowledge of a possible cause of action by the 
Receiver against the Manildis. 

In an effort to overcome this defect, and in an obvi- 
ous attempt to add additional findings of fact which 
have not been made, Appellee's Brief exaggerates the 
extent of the "knowledge" actually found by urging this 
Court to "infer" additional findings from Conclusion of 
Law 2, either simply because such Conclusion of law was 
set forth, or because said conclusion of law is also 
designated as a Finding of Fact, numbered 21. It is 
erroneous for such additional and unexpressed finding 
of fact to be so "inferred". 

2. Findings of Fact Cannot Be "Inferred" Either From 
Other Findings of Fact or From Conclusions of Law as 
Urged by Appellee. 

The general proposition that a Referee's findings of 
fact are to be accepted unless "clearly erroneous" is 
undisputed as a general rule. 

This does not mean, however, that an appellee may 
infer new findings of fact — not made by the trial court, 
from its conclusions of law. As this Court pointed out 
in Lundgren v. Freeman, 307 F. 2d 104, 115 (9th Cir. 
1962), ". . . courts of appeal need give no weight to 
a trial court's conclusions of law ;" thus "inferences de- 
rived from the application of a legal standard" may be 
disregarded. Similarly, in Official Creditor's Committee 
V. Ely, 337 F. 2d 461, 467 (9th Cir. 1964), this Court 
held that "conclusions of law, ultimate findings, or 
mixed findings of fact and law are not binding upon 
a court of review." 

Thus, with respect to the so-called "Findings of 
Fact" numbered 20, 21, 22, and 23, the same have 
been exactly repeated and frankly designated by the 



Referee and adopted by the District Court as Conclu- 
sions of Law numbered 1, 2, 3, and 4, respectively. 
The trial court here limited its findings of fact with 
respect to the "knowledge" of the appellant at and 
before the time of his appointment to those set forth 
in Finding of Fact 7. So-called Finding of Fact 21, 
actually a Conclusion of Law, and designated as 
such as Conclusion of Law 2, is a determination 
based upon Finding of Fact 7, and such determina- 
tion is one which, pursuant to the authorities above 
cited, the reviewing court is neither bound by in any 
respect, and which it is at full liberty to reject out of 
hand with the correct conclusion of law of its own. 

Appellee's contention that appellant had knowledge, at 
or before the time of his appointment, of the possibil- 
ity of a suit in favor of the Receiver and against Manil- 
di, is not based on a finding of fact, but rather on in- 
ferences which Appellee itself draws solely from Con- 
clusion of Law 2. [Find. 21.] This not only flies in 
the face of the Referee's own Conclusion of Law 1 [also 
designated Find. 20] that there was an allegedly actual 
"if not yet known" conflict of interest as between the 
Receiver, on the one hand, and Amstan, on the other 
hand (emphasis supplied), but also of the Referee's 
significant omission of any such specific finding of 
ultimate facts in Finding of Fact 7. 

3. All "Credible Evidence" Supports the Referee's Position 
in Refusing to Find Knowledge on the Part of Appellant 
of a Possible Suit by the Receiver Against Manildi 
When Appellant Was Appointed Attorney for the Re- 
ceiver. 

As if in the hope that mere reiteration of a contention 
will make it true, the Appellee's Brief repeatedly claims 
that "credible evidence" supports a finding that appel- 
lant "knew, or should have known" that the Receiver 



had or might have had a lawsuit against the Manildis, 
even before appellant's employment. Upon examination 
of what Appellee's Brief cites in support thereof, how- 
ever, it is clear that there is no such "credible evidence" 
a;t all. The reference (in Appellee's Br. p. 24) to para- 
graph E of the Receiver's application to employ appel- 
lant as counsel [transcript of record, pp. 10-12, 
incL] relates not to matters involving the Manildis in- 
dividually, but to relationships between the debtor and 
a related corporation, Santa Monica Plumbing & Supply 
Company. Likewise, the references to the June 9, 1966 
and the November 14, 1966 Transcript, quoted in Ap- 
pellee's Brief (pp. 25 and 26), again expressly 
refer to claims not against the Manildis individually, 
but rather to claims against said corporation, Santa 
Monica Plumbing & Supply Company. In addition to 
the fact that claims against a corporate entity, not the 
Manildis individually, were involved, appellee's brief 
conveniently omits the qualifying paragraph which im- 
mediately precedes the said reference to the June 9, 
1966 transcript, which sets the time for the first ac- 
quisition of knowledge of the possibility of a conflict. 

"The first time that it seemed to me that a po- 
tential confHct might arise insofar as my represen- 
tation of the Receiver is concerned, was a result of 
investigations which were initiated during the 
course of the receivership with respect to the in- 
terrelations between Haldeman and Santa Monica 
Pipe & Supply Company, the Santa Monica Com- 
pany." [Emphasis supplied; appellant's testimony, 
Rep. Tr., June 9, 1966, p. 10, lines 11-17.] 

The mere fact that a receiver may have a creditor's 
claim against a corporation of which an individual is a 
"principal" certainly is no basis for ipso facto assuming 
that the receiver necessarily has a lawsuit against such 
principal individually. But the appellee's brief goes 



— 9— 

even further; it apparently contends in all seriousness, 
that because Item E of the affidavit referred to the 
examination of witnesses under §21 (a), that "it must 
be held that the contemplated examinations would in- 
clude an examination of Manildi as the representative 
of the debtor, and that such examinations properly con- 
ducted would inevitably lead to the causes of action in 
case. No. 825741." (by the Receiver v. Manildi, et al.) 
From this, appellee's brief reasons that appellant must 
have all along known what the results of such future 
examinations would be, and therefore, is chargeable be- 
fore the event with knowledge of such examinations 
which had not yet occurred. 

Of course appellant is not chargeable with what de- 
veloped on interrogation — which, incidentally, is not in 
the record. Furthermore, no one ever established, and 
this record does not show, that the Receiver had at any 
time a bona fide claim against Manildi. 

The actual evidence shows appellant had no knowledge 
of such alleged claim prior to his employment as at- 
torney for the Receiver. Appellant's testimony under 
the most persistent of cross-examination, was clear that 
when the Affidavit and Application for his employment 
was prepared and filed, and for many weeks there- 
after, he knew of no facts and had no cause to believe 
that the Receiver had any possible claim against the 
Manildis individually. 

He did not have information which would cause him 
to suspect either that the real property standing in 
Manildi's name was not Manildi's, or that it was subject 
to any claims against him. [Rep. Tr., June 9, 1966, 
p. 8, lines 12-18.] Appellant testified that long after- 
wards, on August 19, 1963, upon the oral report of 
the accountant Kramer respecting his investigation of 
the relationship between Haldeman and Santa Monica, 



—10— 

giving rise to what even then were mere "suspicions" 
in the accountant's mind, that as the result of such in- 
vestigation, it seemed to him for "the first time" that 
a potential confHct might arise by virtue of a possible 
suit against the Manildis individually. [Rep. Tr. June 9, 
1966. Hearing, p. 10, lines 11-17.] 

Again, at page 12, lines 6 through 10 of said Tran- 
script, he testified: 

"Now the accountant started his investigation. 
As a result of his investigation, he became sus- 
picious of whether or not not only there had been a 
diversion of assets from Haldeman to Santa 
jMonica, but questioned the business relationship 
between Manildi as an individual and Haldeman". 
[See also, Rep. Tr., June 9, 1966, p. 13, lines 10-15, 
p. 15, lines 1-8, and p. 51, Hnes 4-10.] 

It has never been shown that the claim became more 
than "suspicions." The facts were never developed in 
this record on which the claim and lawsuit were based. 

Nevertheless, appellant testified that immediately 
after the accountant's oral report. Appellant spoke per- 
sonally with the Receiver and "I put it to him and he 
agreed with me that I did not know if it was going 
to develop that there were any claims in favor of the 
Receiver against IManildi.'' [Rep. Tr. p. 15, lines 12-15.] 
Again, the witness testified that he nevertheless then 
immediately withdrew from representing the Receiver 
in reference to the ]Manildis "as soon as I saw what I 
believed was a potential claim . . . and apparently there 
was not any claim, in fact." [Rep. Tr. p. 21, Hne 19, to 
p. 22, line 3.] 

The surrounding facts and circumstances evidence 
the truth of the assertion that appellant had no knowl- 
edge of the possibility of a suit or possible suit against 
the ]\Ianildis individuallv in favor of the Receiver. 



—11— 

The first day Appellant had ever represented any 
of the creditors who had been referred to him in con- 
nection with the Haldeman case was on May 28, 1963. 
A mere three days later, namely, May 31, 1963, the Re- 
ceiver requested appellant to represent him also, and it 
was on that day that appellant drafted the Attorney 
Affidavit. Whatever knowledge appellant had concern- 
ing the case at the time of drafting the Affidavit was 
gained during said brief interim period. This knowl- 
edge was gained specifically from one telephone call 
from William Collen, his referring Chicago counsel; 
two telephone discussions with Leonard Goldman, the 
attorney representing Haldeman, and also (at that time) 
Manildi; and one conference in Chambers with Mr. 
Goldman and the Referee on May 31, 1963, when Mr. 
Goldman related the general status of the case to appel- 
lant and to the Referee. [November 14-December 2, 
1966, Rep. Tr. p. 17, Hne 22, to p. 18, line 14; p. 19, 
lines 4-24; p. 44, line 1, to p. 45, line 13.] There 
is no evidence at all that any facts were brought to ap- 
pellant's knowledge which in any respect would even 
indicate the possibility of a cause of action or possible 
cause of action of the Receiver against Mr, and Mrs. 
Manildi individually, much less that appellant had any 
knowledge of such. The circumstances of appellant's 
recent and brief introduction to the case are forceful 
proof of the absence of such "knowledge". 

Although certainly appellant was shortly thereafter 
apprised that one of his new creditor clients, Amstan, 
had a claim against Manildi individually arising from a 
guarantee, this certainly does not mean that he was 
thereby given any reason at all to believe that the Re- 
ceiver also had a cause of action or "possible cause of 
action" against Manildi. Certainly if the Receiver, him- 
self an experienced attorney at law, had given appellant 
any such knowledge, directly or indirectly, prior to the 



—12— 

time appellant withdrew as the Receiver's counsel in 
respect to the Manildis upon the making of the ac- 
countant's report on August 19, 1963, in such event 
the Receiver would surely have so testified in these pro- 
ceedings. It is noteworthy that the Receiver never so 
testified, and never testified that he placed any infor- 
mation in appellant's hands, directly or indirectly, which 
would have given knowledge of a possible cause of 
action by the Receiver against the Manildis. 

That appellant had no knowledge of a possible cause 
of action of the Receiver against the Manildis before 
the accountant voiced his suspicions on August 19, 
1963 is also established by the testimony of Attorney 
Leonard Goldman, who at the critical times in question 
represented both the debtor Haldeman and its presi- 
dent, Manildi, individually. 

Mr. Goldman made it clear : 

"For the record, there could not have been, in 
my opinion, the possibility of any outward appear- 
ance of any adversity." [Rep. Tr., June 9, 1966, 
p. 39, line 12, to p. 41, line 7, especially at p. 39, 
lines 21-23.] 

Indeed, Mr. Goldman testified that he himself 
first learned that there was a possibility of a 
claim against the Manildis some time in August 1963 
when Mr. Kramer came in with his report. [Rep. Tr., 
Nov. 14, 1966, p. 62, Hne 17, to p. 63, line 1.] 

If the very attorney who actually represented Halde- 
man and the Manildis at the critical times himself did 
not know of a cause of action or possible cause of action 
in favor of the Receiver against the Manildis, it is over- 
whelmingly clear that appellant with his recent acquaint- 
ance with and limited knowledge of the facts of the 
situation, certainly could not and did not have any prior 



—13— 

knowledge that the Receiver might have a possible cause 
of action against Manildi. 

From the foregoing, it is abundantly clear that the 
evidence does not in the slightest support the so-called 
"inferences" which Appellee's brief would draw from 
the Conclusions of Law. 

11. 
In Failing to Decide on the Basis of Actual Conflict, 
and Instead Deciding the Case on the Basis of 
a Possible Conflict, the Referee and the District 
Court Held Contrary to Statute, Rule and Pre- 
cedent. 

1. An Attorney's Representation of More Than One Credi- 
tor Against the Same Debtor Does Not Ipso Facto 
Mean That He Is Representing at the Same Time Con- 
flicting Interests. 

Appellee's Brief professes the belief that, when ap- 
pellant points out that there in fact was no conflict of 
interest that this is now done belatedly. Such is not the 
case. On the contrary, at the very outset of taking 
testimony upon the within fee application, the absence 
of any genuine conflict in fact was stressed. [Rep. Tr., 
June 9, 1966, p. 4, line 26, to p. 5, line 9; p. 5, lines 
16-21.] 

Implicit throughout Appellee's Brief, and Conclu- 
sions of Law 3 and 4 [also designated, respectively, as 
Finds. 22 and 23] is the assumption that an attorney 
representing more than one creditor against the same 
debtor at the same time ipso facto represents conflict- 
ing interests. However, conflict is not neces- 
sarily inherent in this situation. Indeed, it is common 
in commercial practice for individual creditors, creditor 
groups, collection agencies, and/or credit associations 
to band together and retain the same attorney to prose- 
cute the claims of two or more creditors jointly against 



—14— 

the same individual debtor. This is often done in bank- 
ruptcy proceedings particularly. This practice is fol- 
lowed frequently because mutual creditor interests can 
in this way often be most economically and efficiently 
advanced. Thus, simply because appellant had been 
representing Amstan in reference to its claim against 
Manildi individually did not in and of itself mean that 
thereafter, when the possibility of the Receiver having 
a claim against Manildi was suspected by the accountant 
Kramer in August of 1963. that this meant a conflict of 
interest necessarily existed between the Receiver and 
Amstan. Depending upon the facts of the particular 
case and the facts which might thereafter develop, as 
In the Matter of IfcmLab, 257 F. Supp. 764 (E.D. 
N.Y., 1966) their interests might well have been found 
concurrent and mutual, not conflicting. Therefore, the 
lower Court could not infer any knowledge of a confHct 
solely from the relationship of the parties. 

The attachment levied by appellant on behalf of 
Amstan against the Manildis does not show that the 
appellant acted against the interests of the receiver. 
That attachment was levied shortly after June 10, 1963 
[Find. 9], long before suspicion of a possible claim by 
the Receiver against the JManildis arose. The fact that 
the lower Court concluded [Concl. 4] that this attach- 
ment "reduced, and militated against" the Receiver's 
enforcement of "any claim or cause of action he may 
have had against the Manildis" is therefore irrelevant. 

Further, said conclusion is not supported by any 
finding of fact. There is no showing the ^Manildis were 
insolvent. On the contrary, when the Receiver settled his 
claim against them, they paid nothing and excess funds 
were returned to them. [Clk. Tr. p. 88, lines 12-28.] 
The uncontradicted evidence showed that Manildi had 
substantial excess assets. [Ex. 1, p. 3; testimony of Mr. 
Goldman, his attorney. Rep. Tr., Nov. 14, 1966, p. 65, 



—15— 

line 26 to p. 66, line 3, and p. 66, line 16 to p. 67, line 
2.] 

It is apparent from the above that the lower Court's 
decision was not based on the proposition that the appel- 
lant knowingly acted against the interests of the receiver. 

The Referee himself pointed this up in his comments 
appearing in the Reporter's Transcript of the June 9, 
1966 hearing. The Referee stated : 

'T am not too concerned about the fact that Mr. 
Grodberg did represent the Trustee (sic) on any 
matter where there was a specific or an adverse in- 
terest, / don't think that he did that. The point I 
am trying to get at is, what is the effect of repre- 
senting — let's assume for the moment — of in fact 
representing an adverse interest even though you 
might not know about it? That is what I am get- 
ting at." (emphasis supplied.) [Rep. Tr., June 6, 
1966, p. 41, lines 8-15.] 

Of especial importance is the fact that the one case 
cited by the Referee in support of the position ulti- 
mately taken by him in this regard, and which case 
was quoted approvingly and at length by him in his 
Memorandum Opinion [Clk. Tr. pp. 150-151] has, since 
the rendering of said Opinion, been reversed by a high- 
er court. In re Byrns, Inc., 260 F. Supp. 442 (E.D. 
Va., 1966) ; reversed, Fine v. Weinberg, 384 F, 2d 471 
(4th Cir. 1967). 

In his "Memorandum re Application for Compensa- 
tion, etc." [Clk. Tr. p. 150, line 26] the Referee states 
that 

"the case of In Matter of W. T. Byrns, Inc., 260 
F.Supp. 442, points up the proposition that a 
discovery of an adverse position, even though made 
after the rendition of services, will prevent the 
payment for such services." 



—16- 

After quoting at length from the decision in said Mat- 
ter of Byrns, the Referee concludes at page 14, lines 4 
through 8 of his said Memorandum : 

"It would be my view that an attorney who repre- 
sents one or more general creditors takes the risk 
of the penalties imposed by General Order 44 (11 
USCA following Section 53) if, thereafter, ad- 
verse positions should develop in respect to any of 
the claims represented by him." 

Appellee's Brief states that "we feel compelled to 
bring to the Court's attention" the recent case of Fine 
V. Weinberg, 384 F. 2d 471 (4th Cir., 1967), which 
Appellee's Brief concedes now "appears contrary in 
philosophy" to the contentions urged in said Brief in 
support of the Referee's position just described. How- 
ever Appellee's Brief does not point out that Fine v. 
Weinberg reversed the District Court holding previously 
made in said case sub nom. In the Matter of W. T. 
Byrns, upon which, as above stated, the Reeree and ap- 
parently the District Court so relied in reaching the 
decision which they did. 

The Court of Appeals in Fine v. Weinberg held 
that there is no inherent confhct of interest arising 
from the relationship between a bankrupt corporation 
and its president and sole shareholder, such as to con- 
stitute a prohibition against the same attorney repre- 
senting, at the same time, said president and sole share- 
holder on the one hand, and the trustee of the bankrupt 
corporation (under a deed of assignment) on the other 
hand. Such an attorney was allowed reasonable com- 



—17— 

pensation for services rendered to such trustee out of 
assets of the estate of the debtor corporation in its 
subsequently ensuing bankruptcy proceedings. 

The court, in holding that he was entitled to such 
compensation, stated : 

"We accept and fully approve the teaching of 
Canon 6, (of the American Bar Association) yet 
we think it of doubtful application here. Louis B. 
Fine (the attorney) did not place himself in a 
position of conflict between the corporation and the 
creditors under the deed of assignment. When the 
possibility of conflict grew into reality, he promptly 
withdrew his own and his firm's representation of 
any conflicting interest." 

Accordingly, the appellate court ordered that his fees 
be allowed, and reversed the District Court holding of 
In re W. T. Byrns, Inc., 260 F. Supp. 242 (E.D. Va. 
1966). Fine v. Weinberg, 384 F. 2d 471 (4th Cir. 1967). 

Adherence by the Referee and the District Court to 
the erroneous view of In re Byrns incidentally has a 
further deleterious result with respect to General Order 
44. "Shall have represented," even if unknowingly, 
as interpreted by the Referee and adopted by the Dis- 
trict Court, would render meaningless the qualification 
"to the best of petitioner's knowledge" for the require- 
ments in the Attorney Affidavit. 



—18— 

III. 
In Declaring a Forfeiture by Appellant of All Fees 
Earned as the Receiver's Attorney in Unrelated 
Matters in This Estate, the Lower Court 
Abused Any Discretion It May Have Had 
Under General Order 44, and tlie Cases Cited by 
the Appellee Are Clearly Distinguishable. 

Even if an attorney for a receiver "shall have repre- 
sented any interest adverse to the receiver . . . in any 
matter upon which he is employed for such receiver" 
which, as shown above, was not the situation in the case 
at bar, nevertheless General Order 44 does not "re- 
quire" disallowance of all fees earned by such attorney 
as urged in Appellee's Brief and concluded by the 
Referee and the District Court. [Concl. of Law 5.] 
General Order 44 expressly makes disallowance purely 
discretionary, by the use of the language "the court mxiy 
deny the allowance of any fee to such attorney". (Em- 
phasis added.) 

It has been held that even where a theoretical conflict 
generally existed, an attorney should not be deprived of 
compensation for services where he did not in fact work 
against the interests of the estate. In re Barceloux, 
74 F.2d 288, 294 (9th Cir. 1935). 

In appellee's citation of a number of cases in his 
Brief, appellee has confused said permissive authority 
granted by General Order 44 with the mandatory pro- 
visions of a separate and distinct section of the Bank- 
ruptcy Act, to wit : Section 62d of the Bankruptcy Act. 
In prohibiting the practice of splitting fees in bank- 
ruptcy proceedings. Congress provided in said Sec- 
tion 62d: 

"If satisfied that the petitioner has, in any form or 
guise, shared or agreed to share his compensation 
or in the compensation of any other person con- 



—19— 

trary to the provisions of subdivision c of this Sec- 
tion, the court shall withhold all compensation 
from such petitioner." (Emphasis supplied; Bank- 
ruptcy Act, Section 62d.) 

Thus, a number of the cases cited by appellee in his 
Brief must be distinguished for the simple reason that 
they involve an application not of the discretionary pro- 
visions of General Order 44, but on the contrary, in- 
voked the mandatory provisions of the fee-splitting 
ban of Section 62d. Such was the case in Aiders v. 
Dickinson, 127 F. 2d 957 (8th Cir. 1942); Weil v. 
Neary, (1929) 278 U.S. 160, 49 S. Ct. 144, 7Z L. Ed. 
243; and Stratton v. New, 51 F. 2d at 984 (2nd Cir. 
1931). 

Thus, one of the books of authority cited in Appel- 
lee's Brief in pointing out the discretionary aspects of 
General Order 44 emphasizes that said discretion should 
be exercised fairly, rather than harshly. 

"General Order 44 does not make forfeiture of 
compensation or expenses mandatory. Where the 
attorney for a receiver or trustee has represented 
an adverse interest without disclosing it, the court 
may disallow compensation or reimbursement, or 
both . . ." (3A ColHer on Bankruptcy 1471; em- 
phasis added.) 

"Altogether it would seem that the careful dis- 
tinction drawn by the law between mandatory 
(62d) and discretionary forfeiture (General Order 
44) should be duly respected. Unless local rules 
expressly surrender their discretionary powers as 
to the particular case by adopting a general and 
unconditional mandatory rule declaring allowances 
forfeited for contravention of the rules relating to 
the appointment of attorneys for the estate, com- 
pensation for beneficial services actually rendered 



—20— 

should not be disallowed where at least the spirit of 
General Order 44 was honestly complied with. In 
fact, denial of compensation or reimbursement is a 
sanction distinctly punitive in character and 
should be reserved to cases warranting a moral cen- 
sure. . . ." (3 A Collier on Bankruptcy 147.) 

An instance where denial of all fees was compelled by 
reason of such a mandatory local rule is cited in Appel- 
lee's Brief namely, Stratton v. New, 51 F.2d 984 (2nd 
Cir., 1931). Local Rule 4 of that court prohibited at- 
torneys for an officer of the bankrupt from also 
representing- a receiver, or moving for the receiver's ap- 
pointment. This had been violated and such rule pro- 
vided that no such attorney should "receive any com- 
pensation". No such local rule is involved in the case 
at bar. 

Other cases cited by appellee, unlike the case at bar, 
also involved situations where the claim of a creditor 
was directly and necessarily under known attack by the 
receiver or trustee by whom the creditor's attorney was 
also employed. Thus, In re Westmoreland, 270 F. 
Supp. 408, 411 (D. Ga. 1967) was a case where the at- 
torney for the debtor also represented a corporate credi- 
tor claimant in the same proceeding. This is an in- 
herently conflicting relationship, which ipso facto dis- 
qualifies dual representation, and is not excepted under 
Section 44 of the Bankruptcy Act, which on the con- 
trary permits dual representation of both the receiver 
and a general creditor, as in the present case. 

Although Appellee's Brief contends that certain of 
the cases cited in Appellant's Opening Brief are dis- 
tinguishable because they involved Chapter X proceed- 



—21— 

ings, the case of Woods v. City Nat'l. Bank & Savings of 
Chicago, (1941) 312 U.S. 262, 61 S. Ct. 493, 85 L. 
Ed. 820, relied upon by Appellee also was a Chapter X 
proceeding. Said case, along with In re Woodruff, 121 
F. 2d 152 (9th Cir. 1941) has already been distin- 
guished in Appellant's Opening Brief at pages 26 
through 31 thereof, to which reference is again made. 
Among other things, in said cited cases, at the time of 
appointment, there were existing conflicts between the 
estates and the respective attorneys' creditor clients, 
which disputes were already in progress and fully 
known, and not, as in the instant case, as yet unknown 
"possible" confHcts which might arise at some future 
time after the dual representation was undertaken. 

The cases of Matter of Eureka Upholstering Co., Inc., 
48 F. 2d 95 (2nd Cir. 1931) ; Albers v. Dickinson, 127 
F. 2d 957 (8th Cir. 1942) and possibly Weil v. 
Neary, (1929) 278 U.S. 160, are cases distinguish- 
able in that in said instances there was no initial Order 
of the Court actually appointing the attorney claiming 
fees as attorney for the trustee or receiver. Such at- 
torneys, being volunteers without official status, are, of 
course, ineligible for compensation from the bankrupt 
estates. Appellee's Brief makes much of the strong 
language used in the last-mentioned case, which arose 
in reference to the denial of fees under Section 62d. 
It should be noted, however, that the Chief Justice was 
applying said strong language particularly to the evils 
of fee-splitting, upon the basis of which denial of fees 
is mandatory. In spite of this, it has elsewhere been 
noted, in respect to Weil v. Neary, supra, that the Su- 
preme Court nevertheless in fact did not deny all com- 



—22— 

pensation to the attorneys in the case. This is pointed 
out in Crites, Inc. v. Prudential Ins. Co., 134 F. 2d 925 
(6th Cir. 1943), where it was held that where the 
party complaining of the allowance of fees to said 
attorneys from the estate had stood by for years 
doing nothing about the active representation by the at- 
torneys of opposing interests, even where the attorneys 
and the receiver had a fee-splitting arrangement, the 
court, having in mind that Weil v. Neary, supra, did not 
totally disallow compensation, permitted partial compen- 
sation for beneficial services rendered. 

A fortiori then, the further comment appearing in 
Collier on Bankruptcy is here appropriate : 

"Even when it has been thought that a creditor's 
attorney represented an interest adverse to the bank- 
rupt estate, it has usually been held that such dual 
association would not operate to deny him fair 
compensation for services which inured to the bene- 
fit of the estate." (2 Collier on Bankruptcy 1686.) 

Reference has already been made in Appellant's Open- 
ing Brief to the cases of Item Lab (at pp. 38-41), Cal- 
Neva Lodge (Appendix A, and pp. 24-26, and 41-42), 
Chicago & Westtown Railway (at pp. 58-60), and In 
re Philadelphia & Western Railway (at pp. 29-31, and 
60), which are relevant to this subject. 

Examination of his Application for Attorney fees, 
[Clk. Tr. pp. 94-130] wherein Appellant sets forth his 
services rendered, which are in matters unrelated to the 
Manildis, amply demonstrates that the reasonable value 
thereof found by the Referee to be in the amount of 
$12,500.00 is fully sustained. [Find. 19.] The lower 
court was not ''required" to deny all fees, as it con- 



—23— 

eluded, and it is utterly unconscionable and an abuse of 
discretion on the basis of the fiction the trial court 
envisaged to deny compensation for the said unrelated 
services for which the petition was filed. Appellee's 
Brief, and the Findings and Conclusions of the Court 
do not and cannot point to a single thing done or omitted 
by Appellant which in any way was intended to, or 
did, adversely affect the Receiver. Note also that the 
Referee expressly stated: "I think, as far as I can see, 
Mr, Grodberg did conscientiously what he thought he 

should do ". [Rep. Tr., June 9, 1966, p. 41, Hues 17- 

18.] 

There is no question that appellant's representation of 
a guarantee creditor was known to the Referee, the 
Receiver, the attorney for the Creditors' Committee 
and special counsel for the Receiver, and that this was 
related in open court. [Rep. Tr., June 9, 1966, p. 35, 
line 24, to p. 36, line 7.] Nevertheless, the Receiver and 
the Referee sat back and suffered appellant to proceed 
to render the voluminous, weighty, difficult, and un- 
related services which he did render for a period of 
years thereafter, without once raising any objections or 
even comment at all by them, or anyone else, to his 
continuing to represent the Receiver in said matters. 
Not until the hearings upon appellant's AppHcation for 
Fees were held was the slightest intimation ever made 
by anyone at all that appellant allegedly had technically 
or otherwise represented an interest adverse to the Re- 
ceiver. It is unthinkable that the debtor's estate should 
be so unjustly enriched and the appellant caused to suf- 
fer so drastic a forfeiture of fees for unrelated matters 
as results from the lower Court's decision herein. 



—24— 

It undoubtedly is true that a court cannot be es- 
topped. Yet in considering whether there has been an 
abuse of discretion, equitable considerations must be 
weighed. 

If the decision of the lower Court is permitted to 
stand, it will do more than work a gross inequity 
upon appellant individually. It will have the result of 
discouraging attorneys representing creditors from un- 
dertaking representation of a receiver or trustee, con- 
trary to the intent of Congress to encourage the same 
through the amendments to Section 44 of the Bank- 
ruptcy Act and to the corresponding amendment to 
General Order 44 made shortly thereafter. The reason 
for this simply is that at any time even after the attorney 
has rendered services for a long period of time, anyone 
who regarded the attorney's actions as too forceful or 
felt otherwise unhappy would readily be enabled to cause 
all his compensation to be forfeited. For according to 
the lower Court's decision in this case, all such a person 
need do would be simply to assert, regardless of the 
validity thereof, a contention that a creditor's claim 
represented by that attorney was somehow subject to 
attack. The need for the Receiver to investigate the 
matter, which necessity theoretically would always have 
been present according to the thinking of Appellee's 
Brief and the lower Court's decision, would constitute 
"an actual, if not yet known" conflict of interest be- 
tween the Receiver and that creditor, and this would 
"require" disallowance of all compensation to the at- 
torney. The net result of this would be to close the 
windows of the bankruptcy court to the fresh air 
of active creditor participation through their respective 
counsel. 



—25— 
Conclusion. 

It is respectfully submitted that it is both in the in- 
terests of justice and in the interests of advancing sound 
judicial administration that the Judgment of the Dis- 
trict Court be reversed and that Appellant be allowed 
the reasonable value of his services as Attorney for 
the Receiver, found by the Referee to be in the sum of 
$12,500.00. 

Respectfully submitted, 

Beardsley, Hufstedler & 
Kemble, 

By Seth M. Hufstedler, 
Attorneys for Appellant, 
Haskell H. Grodherg. 



No. 22538 
IN THE 



United States Couirt of Apf)eals 

FOR THE NINTH CIRCUIT 



Mechanical Specialties Company, Inc., 

Petitioner, 
vs. 

National Labor Relations Board, 

Respondent. 



On Petition to Set Aside Order of the National 
Labor Relations Board. 



REPLY BRIEF OF PETITIONER. 



Hill, Farrer & Burrill, p I f C" f^ 

Carl M. Gould, 

Edwin H^RANZEN, j AUG2319B8 

Stanley E. Tobin, | 



Kyle D. Brown, 

34th Floor, 

445 South Figueroa Street, 

Los Angeles, Calif. 90017, 

Attorneys for Petitioner. 



WM. B. LUCK, CLERK 



Parker & Son, Inc., Law Printers, Los Angeles. Phone MA. 6-917L 



TOPICAL INDEX 

Page 
I. 
The Alleged Violation of Section 8(a)(5) of the 
Act 1 

A. The Absence of and the Board's Failure to 
Prove the Union's Majority 1 

B. Petitioner's Refusal to Bargain Was Bot- 
tomed Entirely Upon a Good Faith Doubt as 

to the Union's Majority 8 

II. 

The Section 8(a)(1) Finding With Respect to the 
Wage Increase Is Premised on Mere Conjecture 
Rather Than Substantial Evidence; the Further 
Findings Based Upon Questioning and Alleged 
Threats Are the Product of an Erroneous Inter- 
pretation of the Law 14 

A. The Wage Increase 14 

B. Questioning of Employees 17 

C Alleged "Threats" of Plant Closure 18 

III. 
The Grievance Committee (Sec. 8(a)(2)) 21 

IV. 
The Terminations of Cantrell and Klein (Section 
8(a)(3)) 22 



TABLE OF AUTHORITIES CITED 

Cases Page 

Advance Envelope Mig. Co.. 170 NLRB No. 166 .. 15 

Benson Veneer Co. v. NLRB, F. 2d (4th 

Cir., July 8, 1968) IL 13 

Benson Wholesale Co., Inc.. 164 NLRB No. 75 11 

Betts Baking Company v. NLRB, 380 F. 2d 199 .... 15 

Bourne Co. v. NLRB, 332 F. 2d 47 18 

Crawford Mig. Co. v. NLRB, 386 F. 2d 367, cert, 
den. 390 U.S. 1028 6, 22 

Don the Beachcomber v. NLRB, 390 F. 2d 344 18 

General Steel Products v. NLRB, F. 2d , 

(June 28, 1968) 11 

Lawson Milk Co. v. NLRB, 317 F. 2d 756 22 

McQuay-Norris Mig. Co., 157 NLRB 131 10 

NLRB v. Bardahl Oil Co., F. 2d (8th Cir., 

Aug. 9, 1968) 12 

NLRB V. Ben Duthler, Inc., F. 2d (6th 

Cir., May 2, 1968) 14 

NLRB V. Dan River Mills, 274 F. 2d 381 11 

NLRB v. Exchange Parts Co., 375 U.S. 405 14 

NLRB V. Fashion Fair, Inc., .... F. 2d .... (6th 
Cir. July 30, 1968) 9 

NLRB V. Gissel Packing Co., Inc., F. 2d 

(June 28, 1968) 11 

NLRB V. Heck's, Inc., F. 2d , (June 28, 

1968) 1 1 

NLRB V. Houston Chronicle Pub. Co., 211 F. 2d 
848 23 

NLRB V. Hyde, 339 F. 2d 568 (9th Cir., 1964) .... 12 



111. 

Page 

NLRB V. Laars Engineers, 332 F. 2d 664 15 

NLRB V. Luisi Truck Lines, 384 F. 2d 842 11 

NLRB V. Morris Fishman & Sons, Inc., 278 F. 2d 
792 20 

NLRB V. S. E. Nichols Company, 380 F. 2d 438 .2, 3 

NLRB V. Security Plating Co., 356 F. 2d 725 12 

NLRB V. Sonora Sundry Sales, Inc., .... F. 2d .... 
(9th Cir., Aug. 2, 1968) 8 

NLRB V. Southland Paint Company, 394 F. 2d 717 

1, 3 

NLRB V. Swan Super Cleaners, Inc., 384 F. 2d 609 .. 23 

NLRB V. Texas Electric Cooperatives Inc., .... F. 2d 
.... (5th Cir., Aug. 5, 1968) 7 

NLRB V. TRW-Semiconductors, Inc., 385 F. 2d 753 
18, 19, 20 

NLRB V. Uniform Rental Service Inc., F. 

2d (6th Cir., 1968) 20 

NLRB V. Universal Camera Corp., 340 U.S. 474 .... 16 

NLRB v. Wagner Iron Works, 220 F. 2d 126 23 

NLRB v. Wilson Lumber Co., 355 F. 2d 426 20 

Pulley v. NLRB, F. 2d (June 5, 1968) .. 10 

S. S. Logan Packing Co., 386 F. 2d 562 11 

Southwire Co. v. NLRB, 383 F. 2d 235 20 

Tonkin Corp. of Calif., 165 NLRB No. 61 11 

Tonkin Corp. v. NLRB, 392 F. 2d 141 11 

Miscellaneous 

Gordon, "Union Authorization Cards and the Duty 
to Bargain", 33 Daily Labor Report, BNA, Feb. 
15, 1968 4 



IV. 

Statutes Page 

National Labor Relations Act, Sec. 8(a)(1) 
8, 14, 16, 17 

National Labor Relations Act, Sec. 8(a)(2) 8, 21 

National Labor Relations Act, Sec. 8(a)(3) 8, 22 

National Labor Relations Act, Sec. 8(a)(5) ....1, 8, 11 

National Labor Relations Act, Sec. 8(c) 18 



No. 22538 
IN THE 



United States Coui*t of Appeals 

FOR THE NINTH CIRCUIT 



Mechanical Specialties Company, Inc., 

Petitioner, 
vs. 

National Labor Relations Board, 

Respondent. 



On Petition to Set Aside Order of the National 
Labor Relations Board. 



REPLY BRIEF OF PETITIONER. 



I. 

The Alleged Violation of Section 8(a)(5) of the Act. 

A. The Absence of and the Board's Failure to 
Prove the Union's Majority. 

This Brief will not discuss again the plethora of au- 
thority already covered in Petitioner's Opening Brief 
pertaining to the Union's alleged majority. The Board 
has, at best, attempted to ignore over a dozen Circuit 
Court cases by scarcely mentioning them in footnote; 
the Court, however, is again referred to those cases 
which, upon careful reading, will show, beyond doubt, 
their applicability to the facts in the instant case. Peti- 
tioner will, however, raise one very significant case 
that was published the day after the filing of its 
Opening Brief. 

In NLRB V. Southland Paint Company, 394 F.2d 717 
(5th Cir., May 8, 1968), Judge Wisdom, for a unani- 
mous Court, discussed with precision and in detail 
many of the cases referred to and quoted in Petitioner's 
Opening Brief. In that case, it might be noted, the 
employer committeed virtually every unfair labor prac- 
tice in the book, including conducting wholesale sur- 
veillance on employees attending Union meetings, grant- 
ing raises to employees to spy, establishing a grievance 
committee, threatening to close the plant and reduce 
wages, granting general wage increases and vacation 
benefits, interrogating employees, offering promotions 
to thwart the Union, discriminatorily demoting em- 
ployees, improperly discharging three employees, sus- 
pending one and refusing to hire another. Nonethe- 
less, the Court, while upholding the Board on all those 
counts, recognized that a totally different test is in- 
volved in viewing an 8(a)(5) refusal to bargain charge. 



The Court reviewed the entire history of the so-called 
Bernel Foam and Cumberland Shoe doctrines, and in 
so doing quoted and echoed Judge Friendly's holding in 
NLRB V. S. E. Nichols Company, 380 F.2d 438 (2d 
Cir., 1967) : 

"But while clarity should constitute the begin- 
ning of any effort to show a majority on the basis 
of authorization cards, it is not the end; the 
clearest written words can be perverted by oral mis- 
representations, especially to ordinary working 
people unversed in the 'zvitty diversities' of lahar 
law. It is all too easy for the Board or a review- 
ing court to fall into the error of thinking that 
language clear to them was equally clear to em- 
ployees previously unexposed to labor relations 
matters ; to treat authorization cards, which union 
organizers present for filling out and signing and 
then immediately take away, as if they were wills 
or contracts carefully explained by a lawyer to his 
client is to substitute form for reality. ..." (Em- 
phasis in original.) (394 F.2d at 728-29.) 

In the instant case, the Board, both in its decision and 
its brief, once again ignores the fact that Petitioner's 
employees were constantly told by Union officials and 
adherents and by literature that the cards had one pur- 
pose: the securing of an election. The Board totally 
ignores the fact that these employees, for the most part, 
were totally unsophisticated in labor law, the majority 
of them were of foreign background or recent arrivals 
in this country, and were clearly hoodwinked. Indeed, 
the Board completely ignored the specific testimony 
to this effect that is found in Petitioner's Opening Brief, 
pages 37-59, including the testimony of 19 specific em- 
ployees who were individually deceived. 



— 3— 

The Court in the Southland Paint case set forth 
in exact detail the nature of the misrepresentations 
made to the employees in that case by Union adherents 
(394 F.2d at 731, n. 19). The evidence pointed out 
there is indistinguishable from that in the instant case. 
Judge Wisdom, after pointing to that evidence, stated: 
"We have reviewed the record with more than 
usual care. . . . [T]here is undisputed evidence 
that the solicitors told at least as many as a dozen 
employees that a purpose of the cards was to ob- 
tain an election. At least eight and perhaps more 
employees were permitted to sign under the im- 
pression that the cards were to be used to obtain 
an election. Except in one instance, the trial ex- 
aminer did not discredit the signers' testimony; 
he disregarded it." (Emphasis in the original.) 

The Trial Examiner and the Board in the instant 
case did the exact same thing. 

The Court in Southland Paint again cited the vS". E. 
Nichols case, supra, noting: 

". . . Judge Friendly noted that the cards, unlike 
those in Engineers & Fabricators (but like the cards 
in the instant case), [and in this instant case] 
did not contain an acceptance of union membership, 
'one thing an employee could readily understand'. 
Bearing in mind that 'the function of authorization 
cards ... is to demonstrate that a majority of the 
employees have 'clearly manifested an intention to 
designate the Union as their bargaining represen- 
tative' {Englewood Lumber Co.) . . . there seems 
to be no reason why cards could not state in large 
type that if a majority signed, the union, would 
claim representative status without an election'. 
380 F.2d at 442. We agree." 



— 4— 

We submit that this Court should pick up the clarion 
call that cards, to have the efficacy the Board would 
give them, should contain language to the effect that 
the Union can claim representative status without an 
election. Indeed, we understand, unofficially, that the 
Board is contemplating the promulgation of such a rule/ 

In its Brief, the Board attempts to dismiss the clear 
significance of the Union's misleading and false cir- 
culars as to the purpose of the cards by stating that 
"nearly all the employees had signed the cards before 
the issuance of these circulars . . ." (Bd. Br. 38.) In 
the first place, these circulars merely confirmed what 
Union officials and adherents were telling the em- 
ployees : the cards were simply to bring about an elec- 
tion. Moreover, the fact is, which the Board cannot 
deny, that the Union did not have a majority of signed 
cards prior to March 3 when the first known false 
circular was distributed. At least 12 employees signed 
their cards on or after that date. If these cards, there- 
fore, are tainted with the fraud that is clearly made 
apparent by the circulars alone, then the Union's alleged 
majority disappears.^ 

The Board would make it appear that Petitioner 
seeks to overturn the Trial Examiner's resolution of 



^The Board's Associate General Counsel suggested the need 
for some reform when, after reviewing the law in this field, he 
stated that unions who desire to rely on cards as proof of 
their majority "would be well advised ... in soliciting em- 
ployees, not to make representations which might raise ques- 
tions as to whether the signing employees freely and genuinely 
intended to designate the union as their collective bargaining 
representative." Gordon, "Union Authorization Cards and the 
Duty to Bargain", ZZ Daily Labor Report, BNA, Feb. 15, 1968. 

-See G.C. Ex. (authorization cards) Nos. Z2i. 40, 52, 56, 
59, 65, 67, 68, 7Z, 7A, 81 and 96. 



— 5— 

conflicting testimony and that it is merely a question of 
credibility involved. (Bd. Br. 39-40.) In the final 
analysis, however, there is no avoiding the fact that 
the only basis of the Trial Examiner's finding discredit- 
ing the testimony of numerous employees as to their 
reason for signing cards was his own unique and ex- 
traordinarily unsophisticated position that "one who pre- 
ferred not to have a union would probably prefer also 
not to have an election and would not sign a card." 
[R. 29.] This is the crux of his entire holding on 
this part of the case and it is a position that if it has 
ever been advanced by anyone, has been totally de- 
nounced by all specialists in the area and completely 
denied by all information available, including the AFL- 
CIO Guidebook for Union Organizers (1961). 

Furthermore, the Board asserts that the Trial Ex- 
aminer credited testimony of Sloane that he advised the 
employees that the cards would be presented to the com- 
pany but that the company would in all probability turn 
them down and only then would there be an election. 
(Bd. Br. 3-4; 39; 41.) The references to the record by 
the Board for this statement not only show he made 
no such finding but, in point of fact, he found es- 
sentially the opposite. 

"Vincent Sloane, the Union's representative in 
charge of the campaign, told the gathering, he tes- 
tified, that the Union was attempting to obtain 
status as bargaining representative throughout the 
entire industry in Southern California, and that 
this would come about through elections conducted 
by the National Labor Relations Board." [R. 24- 
25.] 



— 6— 

Moreover, the Board subsequently (Bd. Br. 41) names 
eight employees who were present at that meeting where 
Sloane allegedly made such statements and infers they 
heard such statements. Every one of those named 
employees, with the conceivable exception of one, essen- 
tially denied that Sloane made any such statement.^ 
Even if, against the great weight of evidence, the Trial 
Examiner had credited Sloane, it could be of no avail 
to the Board's position. In Crawford Mfg. Co. v. 
NLRB, 386 F.2d 367 (4th Cir., 1967), cert. den. 390 
U.S. 1028 (1968), the Union agent made virtually the 
same statements that Sloane said he made but the Court 
there indicated that such assertions only cause confu- 
sion and do not support the Board's position. {Id. at 
370-71.) 

In an effort to undermine the testimony of 19 em- 
ployees who stated or indicated that they signed cards 
for the purpose of having an election, the Board (Bd. 
Br. 40-41) adopts the extraordinary argument that be- 
cause many of these employees voluntarily attended one 
or more Union meetings, they "obviously" were in- 
terested or in favor of the Union or at least more so 
than those that did not attend meetings. If this novel 
argument has any substance, they why bother with elec- 
tions at all? Indeed, why bother with authorization 
cards? Why not just count people who go to Union or- 
ganizational meetings? Patently, employees attend or- 
ganizational meetings for a multitude of reasons. Curi- 



■^Cisneros [R.T. 585-586] ; Ciida [R.T. 1504. line 18. to 1505, 
line 7] ; Dellomes [R.T. 1356] ; Garger [RT. 1518. lines 2-5] ; 
Kofink [R.T. 505, line 24. to 508, line 22] ; Lawrence [R. T. 
1479. line 16, to 1480. line 15; 1484]; Wevmar [RT. 518, 
line 29, to 519, line 5: 529. line 19, to 530, line 13; 531, lines 
14-23] . See also Opening Brief, pp. 40-46. 



— 7— 

osity, coercion, and, maybe, just a chance to get away 
from the house could be principal reasons.* 

Finally, the Board's brief tries to deprecate the tes- 
timony of the many employees, witnesses both of the 
General Counsel and Petitioner, because, allegedly, their 
testimony was ''induced." Neither the Board nor the 
Trial Examiner found, nor was there any charge, that 
the Petitioner's actions in preparing for trial were in 
any way improper. Even more importantly, however, 
is the fact that the Board found it necessary to torture 
the record even to make such an assertion. Not only do 
the transcript references cited by the Board fail to sup- 
port its assertion [Bd. Br. 45; R.T. 367-370; 532-536; 
639-642], but, quite the contrary, they show that these 
employees voluntarily and genuinely sought to place the 
true facts before their employer. Contrary to the im- 
plication in the Board's Brief, these employees never 
changed their minds; they simply sought to prevent a 
tour de force by the Union which they considered to 
be not only totally unjustified but fraudulent.^ 



*The Board also argues that none of the employees asked the 
Union or its solicitors for the return of their cards after the 
recognition request. (Bd. Br. 41.) Clearly, even if they knew of 
the request, why should they have asked for the return of 
their cards? The Union said it was going to have an election 
and an election was had. But it was only after the Union lost 
the election, for the first time, did it advise the employees that 
it would seek recognition nonetheless. The employees were 
never told that the Union could do this beforehand. And after 
the election, the majority of the employees ruefully learned that 
it was too late to ask for their cards back. 

^In addition, the Board takes issue with Petitioner's argu- 
ments that three particular authorization cards could not be 
used for determining a majority. (Bd. Br. 33-34.) The Court 
is respectfully directed to a very recent case, in addition to those 
cited in the Opening Brief on this point. NLRB v. Texas Elec- 
tric Cooperatives Inc., .... F.2d .... (5th Cir., Aug. 5, 1968). Nei- 
(This footnote is continued on the next page) 



B. Petitioner's Refusal to Bargain Was Bottomed Entirely 
Upon a Good Faith Doubt as to the Union's Majority. 

After this Reply Brief had been set in galley this 
Court's decision in NLRB v. Sonora Sundry Sales, 
Inc., .... F.2d .... (9th Cir., Aug. 2, 1968) was published 
by the services. This Court in that case, it is submitted, 
strongly supported this Petitioner's position that when 
an employer has reason to believe that employees signed 
authorization cards intending only to express a wish for 
an election and a union engages in misrepresentations 
in order to procure such cards, there is a sufficient basis 
for a good faith doubt, justifying the refusal to recog- 
nize the union. In the instant case the Petitioner had 
solid reason for doubting the union's alleged majority, 
as indicated in detail in Petitioner's Opening Brief and 
in Appendix C thereof, and the union's misrepresenta- 
tions were manifest. 

The Trial Examiner and Board found a lack of good 
faith doubt solely on the alleged 8(a)(1) and 8(a)(2) 
violations. [C.T. 30.]' Most of the alleged 8(a)(1) 
violations, as will be shown below and as has been shown 
in the Opening Brief, can hardly be sustained and 

ther the Board nor Trial Examiner made any finding whatsoever 
that these particular cards were properly authenticated. Petitioner 
finds it unnecessary to add anything further to what it has 
said on this matter (Opening Br. 10-11, n. 6), except to answer 
that Meier, one of the individuals whose card is in question, 
was the same employee who was the first to advise Petitioner of 
the Union's organizational drive ; he further told the company's 
president that he did not want to see the Union in the shop. 
Meier also told him to call him at his home, but the latter 
did not do so. [R.T. 757-758; 910-911.] 

®The findings of violations of Section 8(a)(3) do not enter 
into the good faith doubt position as the Trial Examiner at no 
time relied upon them in finding an 8(a)(5) violation. Of 
course, one of the terminations occurred two weeks after the 
election. 



— 9— 

are, at best, tenuous. Yet the Board in its Brief, as it 
is prone to do in almost all of these cases, paints the 
blackest picture possible of the Employer's actions in 
an effort to have a circuit court rubber-stamp the dra- 
conian remedy it proposes. 

Recent circuit court cases have shown, beyond doubt, 
that even in situations where employers have com- 
mitted wholesale and serious unfair labor practices, this 
may not, by itself, meet the burden imposed upon the 
General Counsel to establish a lack of good faith doubt. 
The Sixth Circuit was confronted with this question in 

NLRB V. Fashion Fair, Inc., F.2d (6th Cir. 

July 30, 1968). There, a unanimous Court upheld the 
Board's conclusions that the employer had violated Sec- 
tion 8(a)(1) and 8(a)(3) by threatening employees 
with discharge for engaging in organizational activity, 
by interrogating them as to organizational activity, 
and by promising them benefits if they refrained from 
giving support to the Union. The Court further up- 
held the Board's finding that the company had dis- 
charged the Union's most active supporter for his Union 
activities and had improperly granted sick leave bene- 
fits. Nonetheless, the Court held the General Counsel 
had not satisfied his burden of proving bad faith by 
the Employer. Citing many of the cases discussed in 
Petitioner's Opening Brief, the Court held that while 
the Employer's conduct may warrant setting aside the 
election, knowledge of a Union's unsuccessful past at- 
tempts to gain recognition by an election was, alone, 
adequate grounds for a good faith doubt. In the In- 
stant case. Petitioner had knowledge of the voluntary 
statements of the majority of its employees at the time 
of the demand that they did not want Union represen- 



—10— 

tation; Petitioner had proof positive of the Union's mis- 
representations that the authorization cards were being 
solicited solely to obtain an election. 

In a previous Sixth Circuit case, Pulley v. NLRB, 
F.2d (June 5, 1968), 11 employees were in- 
dividually interrogated as to their Union membership 
and activity and were asked to report the names of 
other employees engaged in Union activity; the em- 
ployer created the impression that it was keeping Un- 
ion meetings or attendance under surveillance. Once 
again, though the Court upheld the Board's unfair labor 
practice findings, the Court held the General Counsel 
had failed to meet his burden of proof that the em- 
ployer acted in bad faith. The Court noted that of the 
11 employees who were the objects of the employer's 
unfair labor practices, 9 of them were strongly com- 
mitted to the Union and that, therefore, it appeared 
that the illegal activities had little, if any, effect upon 
the freedom of choice guaranteed by the Act nor did this 
activity prevent other employees from signing cards. In 
the instant case, virtually every finding of interroga- 
tion and threats by Petitioner concerned strong Union 
adherents who clearly were not affected. The Court in 
Pulley further found no evidence that the employer's 
conduct dissipated the Union majority. Such is the 
case here ; there is completely absent from the Trial Ex- 
aminer's decision any finding that the alleged unfair 
labor practices dissipated the alleged Union majority. 
Board law requires that to negate an employer's good 
faith doubt, it must be found that the unfair labor 
practices were in fact responsible for the loss of Union 
majority. McQimy-N orris Mfg. Co., 157 NLRB 131 
(1966). 



—11— 

The Fourth Circuit has recently joined the majority 
of circuits in rejecting the Board's position on this 

point. In Benson Veneer Co. v. NLRB, F.2d .... 

(4th Cir,, July 8, 1968), the Court upheld the Board's 
finding that the employer violated Section 8(a)(3) by 
discharging six Union supporters in an effort to 
discourage Union activity, coercively interrogated em- 
ployees, engaged in surveillance, threatened employees 
that the company would close the plant and that other 
serious harm would befall them. Nonetheless, again 
the Court stated that notwithstanding such activity, 
"we do not see the logic in branding the employer's 
queries as in bad faith just because it loses its balance 
and oversteps the line," citing 5". S. Logan Pucking Co., 
386 F.2d 562 (4th Cir., 1967) and NLRB v. Dan 
River Mills, 274 F.2d 381, 388-89 (5th Cir. I960.)' 

Respondent supports its position and relies heavily 
upon this Court's decision in NLRB v. Luisi Truck 
Lines, 384 F.2d 842 (9th Cir., 1967). That case is 
clearly inapposite, however. The alleged good faith 
doubt of the employer there was bottomed entirely upon 
the employer's erroneous doubt of the appropriateness 
of the requested unit. The Board has repeatedly held 
that such a doubt, even if held in good faith, is no de- 
fense to a refusal to bargain charge. Benson Wholesale 
Co., Inc., 164 NLRB No. 75 (1967); Tonkin Corp. of 
Calif., 165 NLRB No. 61 (1967), affd. Tonkin Corp. 
V. NLRB, 392 F.2d 141 (9th Cir., 1968). A very recent 



''^On June 28, 1968, the Fourth Circuit, in a number of cases 
involving wholesale unfair labor practices on the part of em- 
ployers, nonetheless found that a good faith doubt could still 
be had by the employer and rejected the Board's 8(a)(5) find- 
ings. See General Steel Products v. NLRB F.2d ; 

NLRB V. Gissel Packing Co., Inc F.2d ; NLRB v. 

Heck's, Inc., F.2d , all decided June 28, 1968. 



—12— 

Circuit Court decision in NLRB v. BardaM Oil Co., 
.... F.2d -. (8th Cir., Aug. 9, 1968) recognized that 
even a good faith misunderstanding of an appropriate 
unit does not justify a refusal to bargain; the Court, 
however, emphasized that a good faith doubt based upon 
whether the union represents a majority in the claimed 
unit is another matter. The distinction is justified in 
that a good faith doubt based upon majority lessens 
the dangers that a union will be forced upon a noncon- 
senting majority; the same danger does not attach where 
the majority status of the union is conceded and only the 
question of the appropriate unit in involved. In the in- 
stant case, Petitioner's good faith doubt was bottomed 
entirely upon significant evidence that the Union did 
not have a true majority in the unit sought by the 
Union. A good faith doubt on these grounds will ex- 
cuse an employer's failure to recognize a union. See 
NLRB V. Security Plating Co., 356 F.2d 725, 727 (9th 
Cir., 1966) ; NLRB v. Hyde, 339 F.2d 568, 570 n. 1 
(9th Cir., 1964). And concommitant unfair labor prac- 
tices of the types involved in this case do not negate 
the evidence upon which the good faith doubt came 
about. 

The Trial Examiner did not discredit the tremendous 
amount of evidence supporting Petitioner's good faith 
doubt; he simply ignored it. Yet there can be no ques- 
tion, to begin with, that the Employer's Exhibits 4, 5 
and 6 clearly gave more than adequate reason to believe 
that the Union was deceiving the employees. Certainly, 
a good faith doubt on this alone must be sustained; 
the Board totally ignores this. 

The Board indicates that the factual basis for the 
determination of a good faith doubt by Fink and 



—13— 

Howland is suspect and cannot be given weight. (Bd. 
Br. 49.) Yet, tlieir conclusions were fully supported 
by the testimony of virtually every single witness in 
this case. The Board would have us ignore virtually 
all the testimony supporting Employer's Exhibit 7. 
There is absolutely no justification for this type of de- 
cision making.^ The Board totally ignores the fact 
that the employees' statements, as indicated by the 
numerous citations to the record in Appendix B to the 
Opening Brief, were made voluntarily and freely, and it 
simply brushes off the testimony concerning each of 
the employees (Appendix C) showing beyond question 
that Petitioner was totally justified in believing a ma- 
jority of its employees opposed the Union.^ 

Finally, the Board holds that Fink and Howland had 
no evidence at the time of their discussion that the 
Union was over-reaching in obtaining cards and that 
Attorney Gould was given no information as to the ma- 
jority status question when he advised his client. Such 
an assertion is patently contrary to the record. [R.T. 



^The Board states that the company admitted it had no 
knowledge concerning the circumstances under which the 
Union's cards ''may liave been obtained." (Bd. Br. 46-47; 49.) 
This is a totally unjustified twisting of the record. Petitioner 
in its rejection of the Union's demand stated unequivocally that 
it did not believe that its employees had authorized the Union 
to represent them "freely, voluntarily and without coercion." 
It added it had no knowledge of the "authenticity" of the 
cards or how they may have been obtained. Surely, Petitioner 
could not vouch as to whether cards had been forged, but it 
knew that the Union had misled the employees and this goes 
to the question of the cards' "validity." (G.C. 39.) 

^The Board urges that the assessment of Union strength by 
Petitioner was the result of illegal questioning of employees. 
The Trial Examiner made no such finding and such an assertion 
(Bd. Br. 50) is completely negated b}- the evidence. See Ap- 
pendices B and C attached to Opening Brief. See also Benson 
Veneer Co. v. NLRB, F.2d (4th Cir., 1968). 



—1 

791, line 12, to 794, line 14; 886, line 16, to 888, line 
18; 929, line 24, to 934, line 5; 950, line 9, to 959, line 
12; 994, line 19, to 999, line 4, 1174, line 1, to 1175, 
line 19.] '" 

II. 

The Section 8(a)(1) Finding With Respect to the 
Wage Increase Is Premised on Mere Conjecture 
Rather Than Substantial Evidence; the Further 
Findings Based Upon Questioning and Alleged 
Threats Are the Product of an Erroneous In- 
terpretation of the Law. 

A. The Wage Increase. 

Petitioner voices no disagreement with NLRB v. 
Exchange Parts Co., 375 U.S. 405, cited by the Board 
(Bd. Br. 14-15), holding that the conferring of eco- 
nomic benefits by an employer with the express pur- 
pose of discouraging union activity violates Section 
8(a)(1) of the Act. But Exchange Parts merely states 
the legal result which flows from given facts (there 
the employer admittedly granted benefits to influence 
employee choice). The case affords no guidance at all 
for the decision as to whether or not any particular 
change has been improperly motivated. 



i»In NLRB V. Ben Duthler, Inc., F.2d (6th 

Cir., May 2, 1968), the Court noted that an attorney had ad- 
vised the employer in an effort to determine the Union's 
representative status and that the Trial Examiner had refused 
to consider this evidence. 

"Such reasoning ignores the only purpose Mr. Duthler's 
consultation with his attorney might serve : to benefit from 
the attorney's knowledge of the situation and his experience 
and expertise in labor matters. Whatever knowledge and 
experience his attorney had must be attributed to Mr. 
Duthler, who acted in accordance with his attorney's ad- 
vice." 



—15— 

Other authorities rehed upon by the Board are 
equally inappropriate. For example, Bctts Baking 
Company v. NLRB, 380 F.2d 199 (lOth Cir, 1967), 
involved direct evidence of unlawful employer intent. 
No such evidence exists here. Similarly, this Court in 
NLRB V. Laars Engineers, 332 F.2d 664 (9th Cir., 
1964), furnished no support for the Board's position. 
Indeed, if anything, that case operates in Petitioner's 
favor. There the Court founded its decision on the fact 
that the employer had departed in significant respects 
from his past practice in granting wage increases. No 
such evidence of departure exists here. The uncon- 
tradicted evidence is that Petitioner's wage increase 
was in total accord with its prior practice. [R.T. 938- 
942; R. Empl. Ex. 10.] See Advance Envelope Mfg. 
Co., 170 NLRB No. 166 (1968). The Board's state- 
ment (Bd. Br. 16) that Petitioner expanded the cover- 
age of the proposed raises beyond those employees cov- 
ered in the survey misses the mark if it is an attempt 
to stigmatize that action. Approximately 20 top rate 
increases resulted from the survey. [R.T. 897; 1148.] 
At the same time, as Petitioner had always done, em- 
ployees not at the top rate were considered for general 
merit increases. The increases which followed [45 or 
50 out of 115 shop employees; R.T. 1149] were less in 
number and percentage than prior years where as many 
as 80 merit increases were given. [R.T. 1148-1149.]^^ 

The Board's crucial error is in having disregarded 
overwhelming evidence of unlawful motivation in favor 
of raw conjecture — i.e., that the increase was unlawful 
because of a mere coincidence in time with beginning 



^^At one time in the recent past, practically everyone in the 
shop had received a merit increase. [R.T. 1151.] 



—16— 

union activity. Timing is a proper factor to consider, 
but it is rarely, if ever, that an 8(a)(1) finding is 
hinged on that factor standing alone. And even this 
flimsy ground does not withstand scrutiny. The Board 
has conceded that the wage survey was first discussed 
in December 1964, well prior to the advent of any union 
activity at Petitioner's plant. [C.T. 24.] The survey 
was completed and top rate increases decided upon in 
mid-February, 1965 [R.T. 840-841; R.Ex. 18; C.T. 
24] when there was still no notice of Union activity. 
First knowledge of Union organizational efforts came 
to Petitioner via an anonymous phone call on February 
22, 1965 [R.T. 765-766; 909-910] and the first industry- 
wide Union meeting was not held until February 28, 
more than a week after the final decision on increases 
had been made. 

Admittedly, on March 8, 1965, when the increases 
first appeared on employee paychecks, the company was 
aware of some Union activity. But this knowledge did 
not oblige it to withhold an otherwise lawfully con- 
ferred raise especially when there had as yet been no 
demand for recognition, and no petition for an election. 
While the absence of a Union demand or petition does 
not guarantee proper motivation, it is certainly entitled 
to great weight. And when this factor is supplemented 
by abundant evidence of economic necessity and accord 
with past policy, as here, there can be no other con- 
clusion than that the Board's finding lacks the sup- 
port of substantial evidence and, therefore, must be re- 
versed. NLRB V. Universal Cmnera Corp., 340 U.S. 
474 (1951). 



—17— 

B. Questioning of Employees. 

The Board falls into serious error when it contends 
(Bd. Br. 16-18) that the incidents of questioning ad- 
verted to by the Trial Examiner, standing independent- 
ly, constituted violations of Section 8(a)(1). This 
flatly contradicts the Trial Examiner's own finding, 
adopted in its entirety by the Board, that such incidents 
were rendered coercive, and, therefore, unlawful, not 
because of any inherent threat in the conversations them- 
selves, but rather because the incidents occurred against 
a background of allegedly improper statements that a 
Union might force Petitioner out of business. 

The Trial Examiner could not have been more ex- 
plicit on this point : 

"I find in late February and in March the Re- 
spondent [Petitioner] questioned some of its em- 
ployees concerning their interest in the Union and 
that because some of this questioning was in a 
context of threats that a union might force the Re- 
spondent out of business it constituted interfer- 
ence, restraint, and coercion of employees in viola- 
tion of Section 8(a)(1) of the Act." [C.T. 32, 
lines 19-23.] (Emphasis supplied. )^^ 

Clearly, by utilizing the so-called surrounding "con- 
text of threats" to support a Section 8(a)(1) violation, 
the Trial Examiner has conceded that the specific epi- 



^^The Trial Examiner's Conclusions of Law again demon- 
strated his position : "By threatening the close of business in 
the event of Union victory in the representation election and by 
questioning employees concerning their union preferences in the 
context of coercion the Respondent has engaged in and is en- 
gaging in unfair labor practices within the meaning of Section 
8(a)(1) of the Act." [CT. 38, lines 36-49.] (Emphasis sup- 
plied.) 



—18— 

sodes of questioning considered alone were not suffi- 
cient to justify an unfair labor practice finding. To 
the extent, therefore, that the Board now urges the in- 
dependent significance of this questioning, it distorts 
the record by contending upon a ground for which 
neither the Trial Examiner nor the Board ever held. 

Indeed, the Board's decision on this point can only 
be construed as implicit agreement with Petitioner's con- 
tention that the conversations contained no promise of 
benefit or threat of reprisal and were, thus, an exer- 
cise of free speech protected by Section 8(c) of the 
Act. Don the Beachcomber v. NLRB, 390 F.2d 344 
(9th Cir.. 1968); Bourne Co. v. NLRB, 332 F.2d 47 
(2d Cir., 1964). 

C. Alleged "Threats" of Plant Closure. 

We reemphasize a point made in the Opening Brief 
— if the "threats" of plant closure were in fact legit- 
imate campaign predictions, protected by the Act, then 
Petitioner's conversations with employees are automat- 
ically vindicated as well because the background "con- 
text of threats", expressly and exclusively relied upon 
by the Board to find these conversations unlawful, will 
have disappeared. 

This Court need go no further than its own recent 
decision in NLRB t'. TRW-Semiconductors, In<:., 385 
F.2d 753 (9th Cir., 1967), to conclude that the Peti- 
tioner's campaign speeches and literature fell well with- 
in permissible limits. Despite the Board's futile at- 



—19— 

tempts to distinguish it, the case remains squarely on 
point and fully answers each of the contentions raised 
in the Board's brief. For example, it is argued that 
Weitzel's speech of March 9, wherein he stated that 
the Company "could" (not would) go out of business be- 
cause of the Union was a veiled threat to shut down 
if the Union prevailed. But one isolated sentence in 
one speech is no testing ground. The material must 
be viewed in its entirety. On two separate subsequent 
occasions, Petitioner made it crystal clear that it would 
never, on its own, discontinue operations. ^^ 

The literature cited by the Board as "threatening" 
contained nothing more than predications of what the 
Union might do or cause — unsound demands and po- 
tential strikes with their resultant effect on scheduling 
and inconvenience to customers were typical examples. 
[G.C. Ex. 9; 15; C.T. 28, lines 10-28.] This Court's 
holding in TRW -Semi conductors, Inc., supra, is dispos- 
itive of the question: "There is no suggestion that the 
employer will reduce benefits or cut jobs if the em- 
ployees vote for the union. The prediction is that the 
union may or will cause such losses through strikes. 
There is also a prediction that the union's presence may 
or will cause loss of customers, to the possible or even 
probable detriment of employees. Such arguments, too 
are protected by Section 8(c)." 



^^See Weitzel's June 10 speech [G.C. Ex. 19, p. 27], and 
Fink's June 8 letter [G.C. Ex. 17] quoted at page 87 of the 
Opening Brief. 



—20— 

The Board further argues (Bd. Br. 21-22) that the 
Mars-Falco-Alba theme was coercive because the Com- 
pany's statements that these tool and die shops had 
closed on account of union problems had no factual or 
legal basis. Of course, with respect to Falco, Petitioner 
had every reasonable basis for such a contention: 
Falco's former president, Skulsky, had written Petition- 
er a letter to that effect. [C.T. 28, lines 10-28.] More- 
over, the Union had sufficient opportunity to rebut 
these claims, if it could have done so, but made no re- 
sponse. Petitioner contends that everything about 
Falco-Mars-Alba was factually correct, but no differ- 
ent result is dictated if this were not the case. Again, 
TRW-Semiconductors, Inc. hits the mark: 

"Section 8(c) does not protect only those views 
that are correct, nor does it forbid them because 
they are demonstrably incorrect. The remedy is 
for the union to answer them, not a cease and de- 
sist order." (Emphasis supplied.) 

Finally, in typical fashion, the Board refers to Pe- 
titioner's "other coercive conduct," totally unspecified, 
as support for its determination to "discount subtle 
attempts to shift responsibility" for plant closure to the 
Union. (Bd. Br. 23.) This bit of administrative soph- 
istry is accomplished without benefit of a single rec- 
ord citation and despite clear evidence that the Em- 
ployer's statements were exactly what they purported 
to be: lawful predictions as to events over which it 
would have no control. See Southwire Co. v. NLRB, 
383 F.2d 235 (5th Cir., 1967) ; NLRB v. Morrk Fish- 
man & Sons, Inc., 278 F.2d 792 (3rd Cir., 1960); 
NLRB V. Wilson Lumber Co., 355 F.2d 426 (8th Cir., 

1966) ; NLRB v. Uniform Rental Service Inc., F. 

2d (6th Cir., 1968). 



—21— 

III. 
The Grievance Committee (Sec. 8(a)(2)). 

Demonstrating an inclination to place great empha- 
sis on the trivial, the Board persists in citing to the 
Grievance Committee as an illustration of employer mis- 
conduct. Petitioner acknowledges that it suggested re- 
vival of the Committee to discuss topics of mutual con- 
cern on March 9, 1965, some two weeks prior to the 
filing of the Union's representation petition and at a 
time when, to Petitioner's knowledge, Union activity 
was minimal. 

A wide range of subjects was discussed during sev- 
eral subsequent meetings of the Committee and the 
company carefully pointed out that it was legally pre- 
vented from, and would not, make promises with re- 
spect to any item under discussion. [C.T. 26, lines 43- 
49.] With the prescience that stems from hindsight, 
the Trial Examiner and Board have seized upon these 
innocuous meetings, inflated the importance of the sub- 
jects discussed all out of proportion [e.g., company 
agreement to pay for indicator points which cost $1.50, 
Bd. Br. p. 7; Tr. 825-827] and attempted to make a 
major issue out of a violation which, if it is such at 
all, remains highly technical at best. 



—22— 

IV. 

The Terminations of Cantrell and Klein 
(Section 8(a)(3)). 

A. The company's explanation of Cantrell's termi- 
nation "fails to withstand scrutiny" (Bd. Br. 27) 
only if all of the relevant evidence on the point is ig- 
nored, as the Board has done. To illustrate, the Board 
contends that there really was no reduction in Cantrell's 
work, entirely disregarding uncontradicted testimony 
that he was the only night milling machine operator in 
the plant at a time when a significant reduction in 
milling machine work occurred. [R.T. 1025-1026; 1646- 
1651; 1107; 1098-1100.] Since his layoff, no one has 
ever been hired as a replacement on the job he per- 
formed. [R.T. 1697; 1108.] Moreover, Cantrell was 
not offered a job on the jig-bore because management 
was never aware that he had any experience on the ma- 
chine, if indeed he did.^'* Further, he had unequivocally 
refused a jig-bore trainee job twice before. [R.T. 
1101-1102; 1640-1641; 1693.] In these circumstances, 
the Company understandably gave no consideration to 
Cantrell, especially as it required an experienced man. 
There is no objective evidence supporting the Board's 
inference of discrimination, aside from possible knowl- 
edge that he was a Union adherent. This, of course, 
does not operate to prevent a discharge for proper 
cause. Lawson Milk Co. v. NLRB, 317 F.2d 756, 760 
(6th Cir., 1963) ; Crawford Manufacturing Co. v. 
NLRB, supra. 



"Cantrell claimed he told Fink that he had jig-bore ex- 
perience and wanted the job. Management officials denied this, 
stating that Cantrell had never relayed such information. The 
only objective evidence, Cantrell's application for emplovment. 
stated nothing about prior jig-bore experience. [R.T. 1044- 
1045; R. Ex. 11.] 



—23— 

B. Klein was not terminated until two weeks after 
the election which Petitioner had won by a substantial 
margin. [C.T. 34, lines 39-40.] Klein was terminated 
because, as the Trial Examiner found, "Klein's profit 
and loss statement [between March and mid- June 1965] 
shows an almost unbroken string of losses ranging from 
$179 to $839." [C.T. 36, lines 54-55; R. Ex. 18; R.T. 
1266, lines 3-6; R. Ex. 17.] Considering the record 
as a whole, the Board's finding is not supported by sub- 
stantial evidence. 

When there is no direct evidence of discrimination, 
as here, the Board traditionally invokes its so-called "ex- 
pertise" in labor matters as a sufficient basis for its 
determination. Thus, the Board's statement, unaided 
by evidence, that the Company's explanation for Klein's 
discharge does not "ring true." (Bd. Br. 29.) But 
the cases are clear that the burden of proof is on the 
General Counsel to show that some part of the com- 
pany's motivation was discriminatory. NLRB v. Swan 
Super Cleaners, Inc., 384 F.2d 609 (6th Cir., 1967). 
This burden is not sustained by a Board view, unsup- 
ported by substantial evidence, that the discharge was 
for insufficient cause. NLRB v. Houston Chronicle 
Pub. Co., 211 F.2d 848, 854 (5th Cir., 1954); NLRB 
V. Wagner Iron Works, 220 F.2d 126, 133 (7th Cir., 
1955). 

Respectfully submitted. 

Hill, Farrer & Burrill, 
Carl M. Gould, 
Edwin H. Franzen, 
Stanley E. Tobin, 
Kyle D. Brown, 

Attorneys for Petitioner. 



r>lo. 22,538 

IN THE 

.UNITED STATES COURT OF APPEALS 

FOR THE NINTH CIRC i 



Mechanical Specialties, Ini 
Petitioner 



National Labor Relations Board, 
Respondent 



on petition to review and SEl A;,ibi ANi> ON 

cross-petition to I :ni orci: an order of the 
national labor relations board 



BRIEF FOR THE NATIONAL LABOR RELATIONS BOARD 



V\^ 



e^ 



^.VA 



Arnold Ordman. 

OoMiNiCK L. Manu. ., 

1 ssociate General Counsel, 

Mar( LL Mallet-Prevost. 
Assistant General Counsel, 

John D. Burgoyne, 

-"VNASI, 



I? /\ui ij I A f~".< A 



Aftornr]"'. 



National Laboi 



Wjrfi.nqion C TMItL fRfSS 202 393 062!. 



(0 
INDEX 

Page 



ISSUES PRESENTED 1 

COUNTERSTATEMENT OF THE CASE 2 

I. The Board's findings of fact 2 

A. The Union campaign 3 

B. The Company interrogates employees and grants wage increases to 
combat the Union; the Company president also tells assembled em- 
ployees that the Company could close because of the Union and sug- 
gests the formation of a grievance committee which is immediately 

formed and dominated by the Company 4 

C. The Union is authorized as bargaining representative by a majority of 

the employees and seeks to obtain recognition. The Company refuses. . . 8 

D. The Union files an election petition; the Company unlawfully inter- 
feres with the election 9 

E. The Company discharges union leaders Cantrell and Klein 11 

F. The Union loses the election and files objections 13 

II. The Board's conclusions and order 13 

ARGUMENT 14 

I. Substantial evidence on the whole record supports the Board's finding 
that the Company violated Section 8(a)(1) of the Act by granting wage 
increases to discourage union support; interrogating employees as to un- 
ion activities; and threatening employees with plant closure and loss of 
jobs if they selected the Union 14 

A. The wage increases 14 

B. The unlawful questioning of employees 16 

C. Threats 19 

II. Substantial evidence on the whole record supports the Board's finding 
that the Company dominated and interfered with the employee grievance 
committee in violation of Section 8(a)(2) and (1) of the Act 24 

III. Substantial evidence on the whole record supports the Board's finding 
that the Company violated Section 8(a)(3) and (1) of the Act by dis- 
criminatorily discharging employees Alfred Cantrell and Irving Klein for 
their union activities 26 

A. Cantrell 26 

B. Klein 28 



(a) 

IV. Substantial evidence on the record as a whole supports the Board's find- 
ing that the Company violated Section 8(a)(5) and (1) of the Act by 
refusing to bargain collectively with the Union 30 

A. The Union represented a majority of the employees 32 

1. The authenticity of the cards of Anathaiwongs, Doebler, and Meier. . . 33 

2. The vaUdity of the cards 35 

B. The Company's refusal was not motivated by a good-faith doubt of 

the Union's majority 46 

C. The Board's bargaining order was a proper remedy 50 

CONCLUSION 52 

APPENDIX 53 

AUTHORITIES CITED 

CASES: 

Aeronca Mfg. Co. v. N.L.R.B., 385 F.2d 724 (C.A. 9) 26, 27 

Amalgamated Clothing Workers (Hamburg Shirt) v. N.L.R.B., 371 F.2d 740 

(C.A.D.C.) 19, 36-37 

American President Lines, Ltd. v. N.L.R.B., 340 F.2d 490 (C.A. 9) 25 

Atlas Engine Works v. N.L.R.B., _ LRRM _ (C.A. 6), dec. June 28, 1968 ... 35, 

40, 48 

Bauer Welding & Metal Fabricators v. N.L.R.B., 358 F.2d 766 (C.A. 8) 39 

Bernel Foam Products Co., 146 NLRB 1277 32 

Betts Baking Co. v. N.L.R.B., 380 F.2d 199 (C.A. 10) 15 

Blue Flash Express, 109 NLRB 591 19 

Brooks, Ray v. N.L.R.B., 348 U.S. 96 36 

Bryant Chucking Grinder Co. v. N.L.R.B., 389 F.2d 565 (C.A. 2), cert, denied, 

68 LRRM 2408, June 10, 1968 36, 37, 38, 39, 42, 49 

Burk Bros. v. N.L.R.B., 117 F.2d 686 (C.A. 3), cert, denied, 313 U.S. 588 29 

Colson Corp. v. N.L.R.B., 347 F.2d 128 (C.A. 8), cert, denied, 382 U.S. 904. . 19, 33 

Corrie Corp. of Charleston v. N.L.R.B., 375 F.2d 149 (C.A. 4) 23 

Crawford Mfg. Co. v. N.L.R.B., 386 F.2d 367 (C.A. 4), cert, denied, 390 U.S. 

1028 (1968) 37, 43 

Cumberland Shoe Corp., 144 NLRB 1268, enfd, 351 F.2d 917 (C.A. 6) 36, 37 

Daniel Construction Co. v. N.L.R.B., 341 F.2d 805 (C.A. 4), cert, denied, 382 

U.S. 831 17, 18 



(Hi) 

CASES-Cont'd Page 

N.L.R.B. V. Caldarera, 209 F.2d 265 (C.A. 8) 51 

N.L.R.B. V. California Compress Co., 274 F.2d 104 (C.A. 9) 19 

N.L.R.B. V. Cameo, Inc., 340 F.2d 803 (C.A. 5), cert, denied, 382 U.S. 926 . . 17, 19 

N.L.R.B. V. Clark Bros. Co., 163 F.2d 373 (C.A. 2) 18 

N.L.R.B. V. Collins & Aikman Corp., 146 F.2d 454 (C.A. 4) 18 

N.L.R.B. V. Consolidated Rendering Co., 386 F.2d 699 (C.A. 2) 37, 42, 49 

N.L.R.B. V. Cumberland Shoe Corp., 351 F.2d 917 (C.A. 6) 35, 43 

N.L.R.B. V. Dant & Russell, 207 F.2d 165 (C.A. 9) 27 

N.L.R.B. V. Darlington Mfg. Co., 380 U.S. 263 20 

N.L.R.B. V. Delight Bakery, Inc., 353 F.2d 344 (C.A. 6) 51 

N.L.R.B. V. Douglas & Lomason Co., 333 F.2d 510 (C.A. 8) 15 

N.L.R.B. V. Elias Bros. Big Boy, 325 F.2d 360 (C.A. 6) 30 

N.L.R.B. V. Elliott-Williams Co., 345 F.2d 460 (C.A. 7) 47 

N.L.R.B. V. Essex Wire Corp., 245 F.2d 589 (C.A. 9) 16 

N.L.R.B. V. Exchange Parts Co., 375 U.S. 405 14 

N.L.R.B. V. Flomatic Corp., 347 F.2d 74 (C.A. 2) 48 

N.L.R.B. V. Geigy Co., 211 F.2d 553 (C.A. 9), cert, denied, 348 U.S. 821 19, 21, 

37, 43, 48, 50 

N.L.R.B. V. Glasgow, C.J., Co., 356 F.2d 476 (C.A. 7) 37 

N.L.R.B. V. Golub Corp., 388 F.2d 921 (C.A. 2) 23 

N.L.R.B. V. Goodyear Tire & Rubber Co., F.2d (C.A. 5), dec. May 6, 

1968, 68 LRRM 2137 31, 48 

N.L.R.B. V. Gorbea, Perez & Morell, 300 F.2d 886 (C.A. 1) 43 

N.L.R.B. V. Gordon Mfg. Co., _ F.2d _ (C.A. 6), June 6, 1968, 68 LRRM 

2457 32, 37, 43 

N.L.R.B. V. Gotham Shoe Mfg. Co., 359 F.2d 684 (C.A. 2) 43 

N.L.R.B. V. H «& H Plastics Mfg. Co., 389 F.2d 678 (C.A. 6) 25, 47, 48, 49, 51 

N.L.R.B. V. Harrah's Club, 362 F.2d 425 (C.A. 9), cert, denied, 386 U.S. 915 .. . 22 

N.L.R.B. V. Howard, Dan, Mfg. Co., 390 F.2d 304 (C.A. 7) 36, 37 

N.L.R.B. V. Howard-Cooper Corp., 259 F.2d 558 (C.A. 9) 33 

N.L.R.B. V. Howell Chevrolet Co., 204 F.2d 79 (C.A. 9) 33 

N.L.R.B. V. Johnnie's Poultry Co., 344 F. 2d 617 (C.A. 8) 48 

N.L.R.B. V. Kolmar Laboratories, Inc., 387 F.2d 833 (C.A. 7) 20 



(iv) 
CASES-Cont'd Page 



N.L.R.B. V. Kropp Forge Co., 178 F.2d 822 (C.A. 7), cert, denied, 340 U.S. 

810 22 

Don The Beachcomber v. N.L.R.B., 390 F.2d 344 (C.A. 9) 19 

Editorial "El Imparcial," Inc. v. N.L.R.B., 278 F.2d 184 (C.A. 1) 51 

Engineers & Fabricators v. N.L.R.B., 376 F.2d 482 (C.A. 5) 37 

Englewood Lumber Co., 130 NLRB 394 36 

Franks Bros. Co. v. N.L.R.B., 321 U.S. 702 43 

Furr's, Inc. v. N.L.R.B., 381 F.2d 562 (C.A. 10), cert, denied, 389 U.S. 840 ... . 36, 

37-38,41,42 

Gotham Shoe Co., 149 NLRB 862, enf d, 359 F.2d 864 (C.A. 2) 21 

Green, A.P., Fire Brick Co. v. N.L.R.B., 326 F.2d 910 (C.A. 8) 12 

Holmes, D.H., Co. v. N.L.R.B., 179 F.2d 876 (C.A. 5) 51 

Int'l Ass'n of Machinists v. N.L.R.B., 311 U.S. 72 24 

Int'l Union of Elec. Workers v. N.L.R.B., 289 F.2d 757 (C.A.D.C.) 20, 22 

Irving Air Chute v. N.L.R.B., 350 F.2d 176 (C.A. 2) 23, 32, 36 

Jervis Corp. v. N.L.R.B., 387 F.2d 107 (C.A. 6) 17 

Joy Silk Mills v. N.L.R.B., 185 F.2d 732 (C.A.D.C), cert, denied, 341 U.S. 

914 17, 43, 45, 46, 48 

Lane Drug Co. v. N.L.R.B., 391 F.2d 812 (C.A. 6) 48 

Levi Strauss & Co., 172 NLRB No. 57, 68 LRRM 1338 37 

Local 152, Teamsters v. N.L.R.B., 343 F.2d 307 (C.A.D.C.) 51 

Martin Sprocket & Gear Co. v. N.L.R.B., 329 F.2d 417 (C.A. 5) 17 

Master Transmission Rebuilding Corp. v. N.L.R.B., 373 F.2d 402 (C.A. 9) 32 

Matthews & Co. v. N.L.R.B., 354 F.2d 432 (C.A. 8), cert, denied, 384 U.S. 

1002 37, 39, 40, 41, 43, 47, 48 

McEwen Mfg. Co., 172 NLRB No. 99, 68 LRRM 1343 37 

Medo Photo Supply Corp. v. N.L.R.B., 321 U.S. 678 43 

N.L.R.B. v. Antell, Joseph, Inc., 358 F.2d 880 (C.A. 1) 22 

N.L.R.B. V. Atco Surgical Supporters, _ F.2d (C.A. 6), 68 LRRM 2200, 

May 10, 1968 31, 48 

N.L.R.B. V. Austin Powder Co., 350 F.2d 973 (C.A. 6) 46 

N.L.R.B. V. Big Ben Dept. Stores, _ F.2d _ (C.A. 2), 68 LRRM 2311 48, 49 

N.L.R.B. V. Bradford Dyeing Ass'n, 310 U.S. 318 43 

N.L.R.B. V. Britton, V.C, Co., 352 F.2d 797 (C.A. 9) 21 



(v) 

CASES-Cont'd Page 

N.L.R.B. V. Buitoni Foods Corp., 298 F.2d 169 (C.A. 3) 25 

N.L.R.B. V. Cabot Carbon Co., 360 U.S. 203 25 

N.L.R.B. V. Laars Engineers, Inc., 332 F.2d 664 (C.A. 9), cert, denied, 379 

U.S. 930 15, 16, 49 

N.L.R.B. V. Lake Butler Apparel Co., 392 F.2d 76 (C.A. 5) 37, 38 

N.L.R.B. V. Logan Packing Co., 386 F.2d 562 (C.A. 4) 47 

N.L.R.B. V. Louisiana Mfg. Co., 374 F.2d 696 (C.A. 8) 23 

N.L.R.B. V. Luisi Truck Lines, 384 F.2d 842 (C.A. 9) 17, 31, 32, 

34, 39, 46, 48, 50 

N.L.R.B. V. Marval Poultry Co., 292 F.2d 454 (C.A. 4) 19 

N.L.R.B. V. Melrose Processing Co., 351 F.2d 693 (C.A. 8) 27 

N.L.R.B. V. Milco, Inc., 388 F.2d 133 (C.A. 2) 16, 17, 19 

N.L.R.B. V. Miller, 341 F.2d 870 (C.A. 2) 22 

N.L.R.B. V. Morris Novelty Co., 378 F.2d 1000 (C.A. 8) 48 

N.L.R.B. V. Nichols, 380 F.2d 438 (C.A. 2) 37 

N.L.R.B. V. Parma Water Lifter Co., 21 1 F.2d 258 (C.A. 9), cert, denied, 348 

U.S. 829 20, 21 

N.L.R.B. V. Phaostron Instrument & Electronic Co., 344 F.2d 855 (C.A. 9) 34 

N.L.R.B. V. Philamon Laboratories, 298 F.2d 176 (C.A. 2), cert, denied, 370 

U.S. 919 25 

N.L.R.B. V. Phil-Modes, Inc., _ F.2d _ (C.A. 5), 68 LRRM 2380, dec. May 

27, 1968 37 

N.L.R.B. V. Plant City Steel Corp., 331 F.2d 511 (C.A. 5) 20 

N.L.R.B. V. Quality Markets, Inc., 387 F.2d 20 (C.A. 3) 43, 46, 48, 50 

N.L.R.B. V. Ralph Printing & Lithographing Co., 379 F.2d 687 (C.A. 8) . . . 29, 47. 48 

N.L.R.B. V. Realist, Inc., 328 F.2d 840 (C.A. 7), cert, denied, 377 U.S. 994 .... 21 

N.L.R.B. V. River Togs, Inc., 382 F.2d 198 (C.A. 2) 49 

N.L.R.B. V. Security Plating Co., 356 F.2d 725 (C.A. 9) 17, 21, 31, 

35, 37,42,46,48 

N.L.R.B. V. Sehon Stevenson & Co., 386 F.2d 551 (C.A. 4) 45, 47 

N.L.R.B. V. Shedd-Brown Mfg. Co., 213 F.2d 163 (C.A. 7) 27 

N.L.R.B. V. Shelby Mfg. Co., 390 F.2d 595 (C.A. 6) 48 

N.L.R.B. V. Sinclair Co., 68 LRRM 2720 (C.A. 1), dec. July 3, 1968 20 

N.L.R.B. V. South Bay Daily Breeze, No. 21 ,949 (C.A. 9) 37 



(vi) 

CASES-Cont'd Page 

N.L.R.B. V. Southbridge Sheet Metal Works, 380 F.2d 851 (C.A. 1) . . . 32, 36, 37, 44 

N.L.R.B. V. Southland Paint, 68 LRRM 2169 (C.A. 5) 43 

N.L.R.B. V. Standard Coil Prods Co., 224 F.2d 465 (C.A. 1), cert, denied, 350 

U.S. 902 25 

N.L.R.B. V. Stanislaus Implement & Hardware, 226 F.2d 377 (C.A. 9) 39 

N.L.R.B. V. Sunshine Mining Co., 110 F.2d 780 (C.A. 9), cert, denied, 312 

U.S. 678 33, 43, 44 

N.L.R.B. V. Swan Super Cleaners, 384 F.2d 609 (C.A. 6) 36, 37 

N.L.R.B. V. TRW Semiconductors, Inc., 385 F.2d 753 (C.A. 9) 20, 23 

N.L.R.B. V. Trimfit of Calif., 211 F.2d 206 (C.A. 9) 31 

N.L.R.B. V. United Mineral & Chemical Corp., 391 F.2d 829 (C.A. 2) 49 

N.L.R.B. V. Universal Packaging Corp., 361 F.2d 384 (C.A. 1) 15 

N.L.R.B. V. Varney, Frank C, Co., 359 F.2d 774 (C.A. 3) 32 

N.L.R.B. V. Walton Mfg. Co., 369 U.S. 404 39 

N.L.R.B. V. West Coast Casket Co., 205 F.2d 902 (C.A. 9) 16 

Nachman Corp. v. N.L.R.B., 337 F.2d 421 (C.A. 7) 27 

Penney, J.C, Co. v. N.L.R.B., 384 F.2d 479 (CA. 10) 51 

Peoples Service Drug Stores v. N.L.R.B., 375 F.2d 551 (C.A. 6) 48 

Piasecki Aircraft Corp. v. N.L.R.B., 280 F.2d 575 (C.A. 3), cert, denied, 364 

U.S. 933 51 

Sakrete of N. Calif, v. N.L.R.B., 332 F.2d 902 (C.A. 9), cert, denied, 379 U.S. 

961 31 

Shattuck Denn Mining Corp. v. N.L.R.B., 362 F.2d 466 (C.A. 9) 26, 27, 29 

Snow V. N.L.R.B., 308 F.2d 687 (C.A. 9) 31, 47 

Strucknes Constr. Co., 65 LRRM 1385 19 

Surprenant Mfg. Co. v. N.L.R.B., 341 F.2d 756 (C.A. 6) (1965) 20, 21, 23 

Textile Wkrs Union (J.P. Stevens) v. N.L.R.B., 380 F.2d 292 (C.A. 2), cert. 

denied, 389 U.S. 1005 48 

United Automobile Workers v. N.L.R.B., 392 F.2d 801 (C.A.D.C), cert, de- 
nied, 68 LRRM 2408 (June 10, 1968) 35, 36, 37, 44, 46 

United Mine Workers v. Arkansas Oak Flooring, 351 U.S. 62 31 

United Steelworkers (Northwest Engineering) v. N.L.R.B., 376 F.2d 770 (C.A. 

D.C.), cert, denied, 389 U.S. 932 51 

Universal Camera Corp. v. N.L.R.B., 340 U.S. 474 26 

Wausau Steel Corp. v. N.L.R.B., 377 F.2d 369 (C.A. 7) 23, 24, 51 



(vii) 

Page 



STATUTE: 



National Labor Relations Act, as amended (61 Stat. 136, 73 Stat. 519, 29 

U.S.C., Sec. 151, et seq.) 2 

Section 8(a)(1) 2, 14, 24, 26, 30 

Section 8(a)(2) 3, 24 

Section 8(a)(3) 3, 26 

Section 8(a)(5) 3, 30, 48 

Section 8(b)(4)(C) 36 

Section 8(b)(7) 36 

Section 8(c) 17, 19 

Section 9(a) 30 

Section 9(c)(1)(A) 35 

Section 10(c) 2 

Section 10(e) 2 

Section 10(0 2 

MISCELLANEOUS : 

N.L.R.B. Statement of Procedures, Series 8, as amended, Sec. 101.18(a) 35 



IN THE 

UNITED STATES COURT OF APPEALS 

FOR THE NINTH CIRCUIT 



No. 22,538 

Mechanical Specialties, Inc., 
Petitioner 



National Labor Relations Board, 
Respondent 



on petition to review and set aside and on 

cross-petition to enforce an order of the 

national labor relations board 



BRIEF FOR THE NATIONAL LABOR RELATIONS BOARD 



ISSUES PRESENTED 

1. Whether substantial evidence on the whole record supports the 
Board's finding that the Company violated Section 8(a)(1) of the Act by 
granting wage increases to discourage union support; interrogating employees 
as to union activities; and threatening employees with plant closure and 
loss of jobs if they selected the Union. 

2. Whether substantial evidence on the whole record supports the 
Board's finding that the Company dominated and interfered with the em- 
ployees' grievance committee in violation of Section 8(a)(2) and (1) of the 
Act. 



3. Whether substantial evidence on the whole record supports the 
Board's finding that the Company violated Section 8(a)(3) and (1) of the 
Act by discriminatorily discharging employees Alfred Cantrell and Irving 
Klein for their union activities. 

4. Whether substantial evidence on the record as a whole supports 
the Board's finding that the Company violated Section 8(a)(5) and (1) of 
the Act by refusing to bargain collectively with the Union which repre- 
sented a majority of its employees in an appropriate unit. 

COUNTERSTATEMENT OF THE CASE 

This case is before the Court upon the petition of Mechanical Special- 
ties, Inc. (hereafter, the Company) to review, and on cross-petition of the 
National Labor Relations Board to enforce, an order of the Board issued 
on June 28, 1967, against the Company, pursuant to Section 10(c) of the 
National Labor Relations Act, as amended (61 Stat. 136, 73 Stat. 519, 29 
U.S.C. Sec. 151 ef seq.). The Board's Decision and Order (R. 23-42, 66- 
69)^ is reported at 166 NLRB No. 31. This Court has jurisdiction under 
Section 10(e) and (0 of the Act, the unfair labor practices having occurred 
at Los Angeles, California, within this judicial circuit. 

I. THE BOARD'S FINDINGS OF FACT 

Briefly, the Board found that the Company threatened and coerced 
employees in violation of Section 8(a)(1) of the Act by granting wage 
increases to combat union organization, interrogating employees about their 



^References to the pleadings, Decision and Order of the Board, the Trial Exam- 
iner's recommended Decision and Order and other papers reproduced as Volume I, 
Pleadings, are designated "R". References to portions of the stenographic transcript 
reproduced pursuant to the Rules of the Court are designated "Tr." "GCX" refers to 
the General Counsel's exhibits. References preceding a semicolon are to the Board's 
findings; those following are to the supporting evidence. 



3 

union sympathies, and threatening plant closure and loss of jobs if the em- 
ployees selected the Union.^ The Board further found that the Company 
violated Section 8(a)(2) and (1) of the Act by dominating and interfering 
with an employee grievance committee, a labor organization within the 
meaning of the Act. The Board also found that the Company violated 
Section 8(a)(3) and (1) of the Act by discriminatorily discharging employ- 
ees Alfred Cantrell and Irving Klein to discourage union activity. Finally, 
the Board found that the Company refused to bargain with the Union, 
which represented a majority of the employees, in violation of Section 8 
(a)(5) and (1) of the Act. The evidence on which these findings rest is 
summarized below. 

A. The Union campaign 

In the fall of 1964, the Union began a campaign to organize employees 
of tool and die shops throughout Southern Cahfornia (R. 24; Tr. 698). 
The Company, which fabricates tools and other items in its Los Angeles 
plant (R. 24, 7, 16), became aware of this general campaign in December 
of 1964 (R. 24; Tr. 753-754). 

On February 28, 1965, the Union held a meeting for employees from 
a number of tool and die shops in the area, including the Company (R. 
24; Tr. 693-694, 697-698). Vincent Sloane, the Union representative in 
charge of the campaign, spoke to the employees (R. 24; Tr. 694). Cards 
authorizing the Union to bargain collectively on behalf of the signers and 
explanatory material were distributed (Tr. 698-700, GCX 37). Sloane 
explained that the purpose of the cards "in the first instance was to obtain 



International Union, United Automobile, Aerospace and Agricultural Implement 
Workers of America, UAW, AFL-CIO. 



4 I 

representation by the UAW for the employees in the plant" (Tr. 694-695). 
He also advised those present of the procedure leading to recognition and a 
read from a form letter sent by the Union to another employer requesting 
recognition on the basis of a card majority (Tr. 695, GCX 36). However, 
he explained that recognition would probably come about through a Board 
election (R. 25) because, as he stated, in his experience, employers normally 
did not recognize unions on the basis of cards and "in all probabihty we I 
would have to go the route of an election" (Tr. 697).-^ 1 

B. The Company interrogates employees and grants wage m 

increases to combat the Union; the Company president also * 

teUs assembled employees that the Company could close 
because of the Union and suggests the formation of a 
grievance committee which is immediately formed and 
dominated by the Company 

The Company first learned that the Union was seeking to organize its 
employees on about February 22, 1965, (Tr. 1154-1155, 755-756). At 
this time, Vice-President and General Manager Michael Fink told Plant 
Superintendent Robert Howland about the organizational activity and 
asked him to "look into it and report back" (R. 32; Tr. 751, 756, 915- 
918). Howland, in turn, called a meeting of his leadmen and foremen in 
late February and instructed them to "keep their eyes and ears open" for 
union talk and to report information back to him (R. 32; Tr. 1536-1538, 
1583, 1592, 1619, 1628, 1611). These foremen and leadmen sought out 
and obtained information from employees about their union sympathies 
and reported this to Howland (R. 32; Tr. 1525-1526, 1535, 1554, 1564, 
1568-1569, 1586, 1597, 1604-1607, 1624, 1668, 1673). 



The Company offered some testimony that Sloane said the cards would be used 
solely for an election. The Examiner discredited this version of Sloane's remarks and 
thus credited Sloane's testimony (R. 24-25, 29). 



5 

Howland himself questioned employees about the Union (R. 32; Tr. 
527-528, 557-558, 128-129, 1139, 278, 1229-1230, 1428-1429). He ap- 
proached employee Jackie Virgil, stating that he "heard [that Virgil] had 
signed a card". Virgil did not reply (Tr. 384-387). On one occasion after 
a union meeting in mid-March, he questioned employee Anders Ahlstrom 
about the meeting and asked what the Union had promised him (Tr. 393). 
Howland also stated that the Union could not get more money for him, that 
"there would be benefits" and if the union came into the plant he would 
have to pay dues and it would "cut down the hours" (Tr. 393). Also at 
this time, Howland asked employee Irving Klein what the Union could do 
for the Company. After Klein answered, Howland said that the Company 
could either bargain with the Union, fight the Union or "go out of business" 
(R. 31; Tr. 275). On another occasion Howland asked employee Thomas 
Booze what he thought of the Union (Tr. 1430-1431). 

Fink also spoke with many employees about the Union (R. 32; Tr. 
1394, 886-887, 993-994). In early March, 1965, shortly after the first 
union meeting, Fink approached employee Al Cantrell and stated, "I 
understand that there is a Union campaign going on" (R. 31; Tr. 121-122). 
When Cantrell replied there was. Fink stated, "I would like a little kickback 
on it .... Is there anything you could tell me about the [union] meeting, 
or about the campaign?" Cantrell told him that the Union wanted to "see 
if we want to have a Union or be represented by UAW-CIO." (R. 31 ; Tr. 
122). Fink also asked Cantrell to give him the names of other employees 
who attended the union meeting, but Cantrell refused (R. 31; Tr. 122). 

In the course of Howland's conversations about the Union with 
employees, he questioned them about conditions in the shop (Tr. 1229- 



1 



6 

1232). They complained about low wages (Tr. 1231-1232). At the begin- 
ning of March, the Company decided to give raises to its employees (Tr. ■ 
79-81). At this time Company officials were aware of the union activity 
at the shop (Tr. 83-84). The Company announced and put into effect 
raises for some 65 employees in all classifications on March 8, 1965 (R. 
24; Tr. 898, 1 146-1150, GCX 106, 107). 



On March 9, 1965, President Weitzel spoke to assembled employees 
on work time. He stated that he had heard rumors of union talk and dis- 
satisfaction (R. 25; Tr. 33, 36, 279-280). He explained that there was no 
need for a union, that organized shops in San Francisco were barely exist- 
ing and that a union could drive the Company out of business (R. 25; Tr. 
37, 280). He also stated that he felt the Company and the employees 
could solve their problems "among themselves" (R. 25; Tr. 36, 279-280). 
He then suggested the formation of a grievance committee (R. 25 ; Tr. 36, 
280). Representatives for the committee were selected by the employees 
and later that day during working time they met with representatives of 
management (R. 25; Tr. 37-38, 342). A number of topics were discussed 
at the meeting, including increased insurance coverage, vacations, bonus 
and holiday pay (R. 26; 40-41, GCX 3). That evening Foreman Walter 
Payton, an admitted supervisor (Tr. 718), chaired a meeting at which 2 
employees were elected to the grievance committee to represent the night- 
shift employees (R. 25 n. 1; Tr. 338-341). On March 13, President Weitzel 
wrote letters to all employees advising them that he was looking into a 
better hospitalization plan as a result of the meeting (GCX 10). 

Other Grievance Committee-management meetings were held on March 
16, April 5 and May 21, 1965 (R. 26; GCX 3, 4, 5, 7, Tr. 39-47, 342-343). 



i 



7 

Minutes of prior meetings were prepared by the Company and read and 
distributed to employee representatives at the following meeting (Tr. 40- 
46, 343, 354-355, 819). Discussions continued on insurance coverage and 
vacation pay as well as other matters such as hours of work, sick and over- 
time pay, and job classifications (R. 26; Tr. 345, 346, 351-353). At one 
meeting employee representatives brought up the proposal that the Company 
repair or replace measuring indicator points which machinists had to pro- 
vide themselves; the Company agreed to provide and pay for the indicator 
points in the future (R. 26; Tr. 347-349, 359-360, 1 134-1 135, 825). On 
another occasion the Company supplied a larger grinding wheel which the 
Committee representatives had requested (R. 26; Tr. 350, 1135). On April 
7, 1965, the Company distributed to all employees a report signed by 
President Weitzel, of matters discussed at the April 5 management-Grievance 
Committee meetings (R. 26; GCX 6, Tr. 45). In the report, the Company 
stated that it recognized that changes in the group insurance policy "are 
necessary" but because of "labor law regulation while the labor board pro- 
ceedings are pending," the Company would not "give any increased 
benefits." The report continued, "this same problem prevents improved 
benefits regarding holidays, vacation pay and other items discussed with 
your representatives," and promised that the Company would continue to 
have "increased wages and benefits" (R. 26; GCX 6). 

The Grievance Committee has no by-laws, rules or constitution. It 
collected no dues and held no meetings on its own or with other employ- 
ees; it met with management only on working time. Vice-President Michael 
Fink selected the time and place of the meetings (R. 32; Tr. 354, 341 ; Tr. 
38, 47-48, 342). Management officials then notified the employee repre- 
sentatives of the time of the next meeting (R. 32; Tr. 48, 342-343, 344). 



8 

After the May 21 meeting, which was held some three weeks prior to the 
election, no further meetings were apparently ever held. 

C. The Union is authorized as bargaining representative by a 
majority of the employees and seeks to obtain recognition. 
The Company refuses. 

Between Sunday February 28, the day of the first union meeting, and 
Wednesday, March 3, 1965 a majority of the 114 or 115 employees con- 
cededly in an appropriate unit (See Co. Br. 9) signed authorization cards 
(GCX 25, 28-100).^ By March 12, 1965 the Union had received 68 of 
these cards (Tr. 700-703). On that day the Union sent a letter to the 
Company stating that a majority of its production and maintenance 
employees had selected the Union as their bargaining agent. The Union 
also offered to prove its majority status by submitting the cards to an 
impartial third party and stated a desire to begin negotiations towards a 
collective bargaining agreement (R. 25; Tr. 703-704, GCX 38). 

On Sunday, March 14, the Union held a second meeting with employ- 
ees at the Union Hall. About 45 of the Company's employees attended 
(Chg. Party Exh. # 2, Tr. 1745). Howard Berno, an employee who was later 



The Authorization cards read, in relevant part, as follows: 

MAIL THIS CARD TODAY 
AUTHORIZATION TO UAW 

Date , 19 



I authorize UAW to represent me in collective 

(print name) bargaining 

[space for address and 
job information] 



signature 
The reverse of the card, with postage paid, had the Union's name and 
the address of its Los Angeles headquarters. 



9 

appointed Personnel Manager, a supervisory position, attended this meeting 
(R. 25; Tr. 333). The next morning, he reported to Vice-President Fink 
about the meeting and also informed him that Union Representative Sloane 
told those in attendance that he had sent a letter to the Company (Tr. 
1725-1726, 1777-1778). 

On March 19, 1965, the Company responded to the Union's request 
for recognition by letter, stating that it had a "good faith doubt" as to the 
Union's majority. The letter continued, "We do not believe that our 
employees have authorized your organization to represent them, freely, 
voluntarily, and without coercion. We further have no knowledge of the 
authenticity of any authorization cards that you claim to have, or the cir- 
cumstances under which they may have been obtained. For these reasons 
we must decline to recognize you as the bargaining representative of any 
of our employees" (R. 26-27; GCX 39). 

D. The Union files an election petition; the Company 
unlawfully interferes with the election 

On March 22, 1965, the Union filed a petition for an election. (R. 
27; GCX 1(a)). A hearing was held and on May 18, 1965, the Regional 
Director ordered an election to be held in an appropriate unit (R. 27; GCX 
l(b)(c)). 

In leaflets and letters sent or distributed to individual employees, the 
Company urged the employees to reject the Union. In one communication 
the Company stated that a union contract "is no better than the ability of 
the company to continue to remain in business. Look at what happened 
to Falco Tool and Die. It had a contract with this Union but where is it 
now?" (R. 27; GCX 9, Q&A # 25). On May 12, Vice-President Fink elab- 
orated in a letter to all employees, stating: 



10 

If you have not heard or are a newcomer to the trade, Falco, 
Mars and Alba Engineering were large and successful job 
shops in the area and some years back their employees were 
promised the Pie-in-the-Sky and went union. As the story 
goes, the Pie-in-the-Sky hit the sky blue yonder. Alba Engi- 
neering lasted six months; Mars and Falco did not last much 
longer when they too hit the blue because these shops could 
no longer operate with the shop stewards or the boys from 
Detroit. (R. 27; GCX 14, Tr. 56). 

The Company also sent other letters to employees. One from its regional 
sales manager, stated that customers were "concerned about the conse- 
quences" should the Union succeed and whether the Company could com- 
pete (R. 27; GCX 15). Another letter, solicited by President Weitzel, bore 
the signature of the former president of Falco Machine and Tool Company. 
The letter stated that his company was prospering when "a union was 
introduced into our plant." The letter also praised the Company's man- 
agement and stated, "the employees of Falco chose a union and found 
themselves heading down the road to self-destruction." (R. 28; GCX 20). 

On June 8, 1965, Fink again wrote to employees. He emphasized 
that the Company "did not have to give a thing" the Union asked for and 
that a strike would follow if the Union's demands were rejected. Urging 
employees to disbelieve Union claims that a strike would not occur, he 
asserted, "It could happen especially when that union is the UAW. They 
have called many strikes-some of them long, brutal and bloody." Enclosed 
with the letter was a copy of a pamphlet, issued in April 1955 by the 
Kohler Company of Kohler, Wisconsin, portraying in a photograph on its 
cover Kohler's view of the violent strike which began there in 1954. 
Inside, the pamphlet Usts asserted UAW abuses such as "serv[ing] only the 
Marxist doctrine" (R. 28; GCX 17a & b). 



11 

On June iO, 1965, the day before the election, President Weitzel 
spoke to employees in the shop by telephone transmitted through a public 
address system. He appealed to employees to reject the Union. He stated 
"If we have problems, let's solve them ourselves. That is why we have our 
shop committee. . . ." He later stated that if the Union won the election, 
"the very life of this Company— may be— your job— all our jobs— would 
depend upon our resistance to any economically unsound demand." He 
ended by saying, "If you vote for the union, you are saying that I don't 
deserve 'to keep my business.' A vote for the union is a vote against me 
personally . . ." (R. 28; GCX 19, Tr. 60). 

E. The Company discharges Union Leaders Cantrell and Klein 

Alfred Cantrell, was a milling machinist on the night shift and an out- 
spoken union advocate (R. 33; Tr. 117, 137, 1178, 1358). He was fired 
on May 11, 1965, one month before the election (R. 33; Tr. 129). Can- 
trell had attended union meetings, solicited authorization card signatures, 
and talked up the Union in the shop (Tr. 118-120). As previously noted, 
Vice-President Fink had questioned him about one union meeting and at 
that time Cantrell refused to supply Fink with the names of those who 
attended {supra, p. 5). Later, in early April, Personnel Manager Howard 
Berno introduced Cantrell to a psychology professor, Howard Schwartz, 
who was visiting the plant, as the "strongest Union man in the shop" (R. 
31; Tr. 124-125). Berno left and Schwartz questioned Cantrell as to why 
he supported the Union (R. 31; Tr. 126). 

On Cantrell's last day of work he was notified by a temporary fore- 
man, Paul Mansfield, that the Company was laying him off. Mansfield 
could not supply Cantrell with a reason for his selection, but stated that 



12 

i 

this "makes me more for the Union" (R. 34; Tr. 129-131). The next day, I 
May 1 2, Cantrell went to Fink's office. Fink told him he was being laid 
off because of a shortage of work (R. 34; Tr. 132). Cantrell told Fink | 
about an ad, placed in that day's paper by the Company, seeking a jig-bore 
machinist. Fink at first denied the Company was looking for a machinist, 
but was informed by Personnel Manager Bemo, who was also present, that 
there was indeed such an ad. Fink then told Berno to remove the ad (R. 
34; Tr. 132-135, GCX 26 and 27). Cantrell was not offered the job nor 
was he recalled (R. 34; Tr. 139). 

Irving Klein, a tool and gauge maker with some 23 years' experience, | 
was fired on June 25, 1965, shortly after the Union filed objections to the 
election {infra, p. 13). Klein was notified by Union Representative Sloane 
of the industry-wide organizational campaign and he began to solicit union 
support at the shop beginning in mid-February, 1965 (R. 25; Tr. 270-272). 
He was active in the union campaign, attended union meetings and solicited 
authorization cards from employees (R. 25; Tr. 270-273). The Company 
interrogated him about what the Union could do for the Company and he 
replied that what was important was what the Union could do for the 
trade (Tr. 275). Howland twice warned him that the Company could go 
out of business if the Union won representation (Tr. 275, 278). On another 
occasion, Howland approached Klein and stated, "Irving, you don't look 
like an organizer to me". When Klein objected, Howland rephed that he 
did not mean a "paid" organizer, but that he considered all employees 
campaigning for the union organizers (R. 67; Tr. 276-277, 1113-1 114). 

On the day of Klein's discharge. Foreman Franz Isak called him into 
an office and, in the presence of Personnel Manager Howard Bemo, told 



13 

him that he had been "following [Klein] around", that Klein "was too 
slow" and he had to "let [Klein] go" (R. 26; Tr. 282). At this time and 
without explanation Isak handed Klein a profit and loss statement, but 
before Klein had a chance to study it, Berno took it back (Tr. 282). Isak 
then handed Klein a discharge slip and his final two checks (Tr. 282). 

F. The Union loses the election and files objections 

On June 1 1, 1965, the election was held. Of the 1 15 eligible voters, 40 
voted for the Union and 59 against (R. 27; GCX 1(d) ).-^ By telegram on 
June 17, 1965, the Union filed timely objections to the election (R. 27; 
GCX l(p)). On July 6, 1965, the Union filed the first of several charges 
alleging the Company had committed unfair labor practices and a complaint 
issued (GCX l(0(j))- The Regional Director ordered a hearing to resolve 
the issues raised by the Union's objections to the election, and that hear- 
ing was consolidated with the unfair labor practice hearing (R. 27; GCX 
1(e)). 

II. THE BOARD'S CONCLUSIONS AND ORDER 

Upon the foregoing facts, the Board found that the Company violated 
Section 8(a)(1) of the Act by granting wage increases, interrogating em- 
ployees and threatening plant closure and loss of jobs if employees selected 
the Union. It also found that the Company's domination and interference 
with the Grievance Committee violated Section 8(a)(2) and (1) of the Act 



•^The Board, in the instant case, upheld the Regional Director's determination of 
the appropriate unit (R. 29): 

All production and maintenance employees employed by the Em- 
ployer at its Los Angeles, California plant, including the production 
liaison employees, inspectors, inspector trainee and draftsmen tool; 
but excluding all office clerical employees, professional employees, 
guards, watchmen and supervisors as defined by the Act. 



14 

and its discriminatory discharges of employees Cantrell and Klein violated 
Section 8(a)(3) and (1) of the Act. The Board further found that the 
Company unlawfully refused to bargain with the Union in violation of Sec- 
tion 8(a)(5) and (1) of the Act as it represented a majority of the employees 
in the appropriate unit (R. 67-68, 29-30, 38-39, 32-33).'^ 

The Board ordered the Company to cease and desist from the unfair 
labor practices found and from in any other manner interfering with, 
restraining or coercing its employees in the exercise of their rights under 
the Act, Affirmatively, the Board's order requires the Company to dises- 
tablish the Grievance Committee; offer full reinstatement with backpay to 
Cantrell and Klein; upon request, bargain collectively with the Union, and 
post appropriate notices (R. 39-40, 69). 

ARGUMENT 

I. 

SUBSTANTIAL EVIDENCE ON THE WHOLE RECORD SUPPORTS THE 
BOARD'S FINDING THAT THE COMPANY VIOLATED SECTION 8(a) 
(1) OF THE ACT BY GRANTING WAGE INCREASES TO DISCOURAGE 
UNION SUPPORT; INTERROGATING EMPLOYEES AS TO UNION 
ACTIVITIES; AND THREATENING EMPLOYEES WITH PLANT CLO- 
SURE AND LOSS OF JOBS IF THEY SELECTED THE UNION 

A. The Wage Increases 

It is settled law that the granting of economic benefits to discourage 
support for a union violates Section 8(a)(1) of the Act. N.L.R.B. v. Ex- 
change Parts Co., 375 U.S. 405. As the Supreme Court there stated, "The 
danger inherent in well timed increases in benefits is the suggestion of a 



The Board also set aside the election in which the Union was defeated and 
vacated all proceedings in connection therewith, because of the Company's unlawful 
conduct which interfered with the free choice of employees (R. 33, 40). 



15 

fist inside a velvet glove. Employees are not likely to miss the inference 
that the source of benefits now conferred is also the source from which 
future benefits must flow and which may dry up if it is not obliged." {Id. 
at 409). We submit that the raises awarded here are clearly unlawful under 
this rule. The Company's granting of wage increases to some 65 employees 
at the very beginning of the Union campaign was manifestly timed to 
influence employee choice. In mid-February, 1965, the Company learned 
of employee support for the Union and dissatisfaction with wages. On 
March 8, only a week and a half after many employees had attended the 
first Union meeting and a majority had signed authorization cards, the 
Company put the raises into effect. At this time, as Vice-President Fink 
admitted, the Company was fully aware of the Union campaign among 
its employees (Tr. 83-84). Moreover, the next day, President Weitzel 
suggested that there was no need for an outside union and urged formation 
of an unlawfully controlled grievance committee {infra, pp. 24-25). In 
these circumstances, the Board could properly conclude that the Company's 
action was unlawful. See N.L.R.B. v. Laars Engineers, Inc., 332 F.2d 664, 
665-667 (C.A. 9), cert, denied, 379 U.S. 930; N.L.R.B. v. Douglas & 
Lomason, Co., 333 F.2d 510, 513-514 (C.A. 8); N.L.R.B. v. Universal 
Packaging Corp., 361 F.2d 384, 387 (C.A. \)\ Bet ts Baking Co. v. N.L.R.B., 
380 F.2d 199, 203 (C.A. 10). Contrary to the Company's contention (Br. 
90), the coercive impact of such action is not dependent on whether the 
Union had requested recognition. In N.L.R.B. v. Laars Engineers, supra, 
this Court held that a wage increase was unlawful even though no recogni- 
tion request had been made and the only union activity was the distribution 
of literature. 



16 

The Company's contention (Br. pp. 90-91) that the wage increases were 
unrelated to the contemporaneous union activity is without merit. The Com- 
pany's alleged decision to conduct a wage survey in December, 1964 was not 
announced anywhere but in the councils of management. Indeed, the deci- 
sion appears to have been prompted by a realization that the Union was try- 
ing to organize the industry in that area (Tr. 753, 1 145) since the Company 
had just given raises 5 months before (Tr. 939, RX 10). Instead, the Com- 
pany chose to announce and implement the raises at a time of maximum 
impact. It also expanded the coverage of the proposed raises, which orig- 
inally applied only to "top rated" employees, to embrace employees in all 
classifications, some of whom had not been covered in the survey (Tr. 
1146-1150, GCX 106). Thus, the Board could properly reject the exculpa- 
tory testimony of Company officials. See N.L.R.B. v. Laars Engineers, 
supra. 

B. The unlawful questioning of employees 

As this Court has recognized, "Interrogation as to union sympathy 
and affiliation has been held to violate the Act because of its natural tend- 
ency to instill in the minds of employees fear of discrimination on the 
basis of the information [sought]". N.L.R.B. v. West Coast Casket Co., 
205 F.2d 902, 904. And, "Whether the Company would be disposed to 
make use of the [information] is beside the point. As long as the oppor- 
tunity is present, employees may have a real fear that this would be done." 
N.L.R.B. V. Essex Wire Corp., 245 F.2d 589, 592 (C.A. 9). In accord is 
the Second Circuit which has recently affirmed that, even where there are 
no expHcit threats, interrogation is unlawful if "the circumstances indicate 
that coercion is impHcit in the questioning" N.L.R.B. v. Milco, Inc., 388 
F.2d 133, 137 (C.A. 2). Relevant circumstances include whether there is 



I 



17 

a background of employer hostility and other unlawful activity; whether 
the employer seeks information to test a claimed majority or seeks to fer- 
ret out information most useful for purposes of discrimination, as when 
employees are asked to identify union supporters; or whether the identity 
of the questioner, for example a high management official, might create an 
aura of coercion. N.L.R.B. v. Milco, supra. See also N.L.R.B. v. Luisi 
Truck Lines, 384 F.2d 842, 843 (C.A. 9); N.L.R.B. v. Security Plating Co., 
356 F.2d 725, 728 (C.A. 9)\Jervis Corp. v. N.L.R.B., 387 F.2d 107, 111 
(C.A. 6); Daniel Construction Co. v. N.L.R.B., 341 F.2d 805, 812 (C.A. 4), 
cert, denied 382 U.S. S3\; N.L.R.B. v. Cameo, Inc., 340 F.2d 803, 804- 
807 (C.A. 5), cert, denied, 382 U.S. 926; Joy Silk Mills, Inc. v. N.L.R.B., 
185 F.2d 732, 742-744 (C.A.D.C), cert, denied, 341 U.S. 914.^ 

The Board's conclusion that the widespread interrogation engaged in 
by the Company here (supra, pp. 4-5) was coercive and therefore illegal 
is clearly correct. Particularly relevant is the fact that two high ranking 
officials, Vice-President Fink and Plant Superintendent Howland, undertook 
much of the questioning. Fink's request that employee Cantrell supply 
him with names of those who attended the first Union meeting obviously 
sought "information most useful for discrimination" N.L.R.B. v. Milco, 
supra. When Howland questioned Klein he mentioned the possibihty that 
the Company could go "out of business" if the Union came in; and he told 
employee Ahlstrom "there would be benefits" (supra, p. 5). In addition. 



The Company's assertion (Br. 83) that Section 8(c) of the Act protects interro- 
gations unless accompanied by threats of reprisal or promises of benefit is contrary to 
all the authorities and the language of the Act. Interrogation is something more than 
simply the "expressing of any views, argument or opinion" (infra p. 19, n. 10). See, 
e.g., Martin Sprocket & Gear Co. v. N.L.R.B., 329 F.2d 417, 420 (C.A. 5). The cases 
cited by the Company do not support its contention; they simply hold that on the 
facts in those cases the questioning was not coercive. 



18 

management officials instructed foremen and leadmen (admitted supervisors 
(Tr. 718)) to obtain information concerning union sympathies of employ- 
ees in their department which they later conveyed to Rowland. The Exam- 
iner concluded (R. 32, 30), in part from his observation of the witnesses, 
that some of this information was obtained through questioning. For 
example, Vernon Zeeman, a leadman, testified he reported what he "could 
get out of an employee (R. 32; Tr. 1624); and Foreman Walter Payton 
admittedly asked another employee how he felt about the Union (Tr. 
1477). In carrying out their function of making determinations as to the 
credibility of witnesses, the Examiner and the Board properly rejected tes- 
timony that all such information was provided voluntarily (See cases cited 
infra, p. 39).^ 

Furthermore, all of the questioning bore the aura of the Company's 
known hostility toward the Union, evidenced especially, as the Examiner 
noted (Br. 32), by the threats that the Company could go out of business 
because of the Union. President Weizel made this threat in a speech to all 
employees in which he also suggested formation of a company-dominated 
committee to combat the Union. It is also significant that the Company 
had no legitimate reason to question employees about their union activi- 
ties or sympathies. The Company's interrogations, in the main, were 
undertaken before receipt of the Union's bargaining demand. Thus, the 



Apart from constituting interrogation, coercive in context, such activity is akin 
to unlawful surveillance of union activity (cf. N.L.R.B. v. Collins & Aikman Corp., 146 
F.2d 454, 455 (C.A. 4)) especially when it is undertaken at the behest of management 
(see Daniel Construction Co. v. N.L.R.B., 341 F.2d 805, 812 (C.A. 4), cert, denied, 
382 U.S. 831). "[I]ntentional eavesdropping [is] likely to deter free discussion by em- 
ployees of self-organizational matters." N.L.R.B. v. Clark Bros. Co., 163 F.2d 373, 375 
(C.A. 2). 



19 

interrogation was not in support of a good faith effort to ascertain the 
validity of union authorization cards. This distinguishes the interrogation 
in the instant case from the limited questioning, free from coercion, sanc- 
tioned by this Court in Don the Beachcomber v. N.L.R.B., 390 F.2d 344, 
cited by petitioner (Br. 83). See N.L.R.B. v. Milco, supra. Nor was the 
questioning accompanied by statement of a business purpose or assurances 
against reprisal. The coercive effect was thus "more likely," N.L.R.B. v. 
Cameo, Inc., supra, 340 F.2d at 806-807. See also, N.L.R.B. v. California 
Compress Co., 274 F.2d 104, 106 (C.A. 9); Blue Flash Express Co., 109 
NLRB S9\; Struksnes Const. Co., 165 NLRB No. 102, 65 LRRM 1385, 
1386.^ 

C. Threats 

The Board also properly found that the Company's emphasis in 
speeches and letters to employees on the possibility that it would close its 
plant and that employees would lose their jobs if they selected the Union 
exceeded the bounds of free speech and violated the Act.^^ The statute 



The Company cannot disavow the conduct of its leadmen and foremen (Br. 83- 
84) who were instructed by management to seek out information of union support. 
Clearly, the employees could "reasonably believe that in making [the statements, the 
foremen and leadmen were] acting for and on behalf of management." N.L.R.B. v. 
Geigy Co., 211 F.2d 553, 557 (C.A. 9), cert, denied, 348 U.S. S2\;Betts Baking Co. v. 
N.L.R.B., supra, 380 F.2d at 202 and cases there cited. This also applies to the ques- 
tioning of Cantrell by Personnel Manager Berno's professor friend (supra p. 11). See 
Amalgamated Clothing Workers (Hamburg Shirt Corp.) v. N.L.R.B., 371 F.2d 740, 744 
(C.A.D.C); Colson Corp. v. N.L.R.B., 347 F.2d 128, 137 (C.A. 8), cert, denied, 382 
U.S. 904. Nor can the Company contend successfully that it should escape liability for 
the one incident of interrogation it asserts (Br. 84) was conducted in a "friendly and 
joking atmosphere." See, A.P. Green Fire Brick Co. v. N.L.R.B., 326 F.2d 910, 914 
(C.A. S); N.L.R.B. v. Marval Poultry Co., 292 F.2d 454 (C.A. 4). 

Section 8(c) of the Act provides that "the expressing of any views, argument 
or opinion . . . shall not constitute or be evidence of an unfair labor practice ... if such 
expression contains no threat of reprisal or force or promise of benefit." 



20 

prohibits implied or direct suggestions that in reprisal for unionization the 
employer will make economic decisions adversely affecting employment, 
thereby "making anticipated events the subject of threats ... to force 
abandonment of the Union by the employees". N.L.R.B. v. Parma Water 
Lifter Co., 211 F.2d 258, 262 (C.A. 9), cert, denied, 348 U.S. 829. 
Accord: N.L.R.B. v. Plant City Steel, 331 F.2d 511, 513 (C.A. 5). "It is 
well settled that an employer's 'prediction' of untoward economic events 
may constitute an illegal threat if the employer has it within his power to 
make the prediction come true." International Union of Electrical 
Workers, etc. v. N.L.R.B., 289 F.2d 757, 763 (C.A.D.C). Accord: 
N.L.R.B. V. TRW Semiconductors, Inc., 385 F.2d 753, 758 (C.A. 9). 
Plant closures are uniquely within the power of management and hence 
employer threats that such action will follow unionization are unlawful. 
N.L.R.B. V. Darlington Mfg. Co., 380 U.S. 263, 274 n. 20. Thus, in order 
to be protected, "IT] he employer's prediction must be in terms of demon- 
strable 'economic consequences,' Surprenant Mfg. Co. v. N.L.R.B., 341 
F.2d756,761 (6th Cir. 1965)." N.L.R.B. v. Sinclair Co., 68 LRRM 2720, 
2721-2723 (C.A. 1, decided July 3, 1968). See also N.L.R.B. v. Kolmar 
Laboratories, Inc., 387 F.2d 833, 837 (C.A. 7). 

In his March 9 speech. President Weizel stated that organized shops 
elsewhere were barely surviving and that the Company "could" go out of 
business because of the Union. The statement was coupled with the 
suggestion that the Company could solve its own problems through a 
company-dominated grievance committee. It is plain that Section 8(c) 
does not insulate Weizel's speech. It obviously amounted to more than a 
general prediction of economic consequences beyond the Company's 
power to control. Weizel cited no competitive reasons for the probable 



21 

shutdown; nor did he suggest that the Union would strike or impose any 
unreasonable demands if it succeeded in obtaining bargaining rights. 
Furthermore, he made it plain that the employees could expect benefits 
from the Company through the grievance committee and not through the 
Union. Here, as in N.L.R.B. v. Realist, 328 F.2d 840, 843 (C.A. 7), cert, 
denied, 377 U.S. 994, Weizel's statement that the Union could shut down 
the Company constituted a "veiled or implied threat to [shut down] . . . 
if the union prevailed" and the reference to the unlawful grievance com- 
mittee "conveyed the idea that ... the company would afford benefits 
equally as good if not better to its employees if there were no union." 
See also, N.L.R.B. v. Geigy Co., 211 F.2d 533, 557 (C.A. 9), cert, denied, 
348 U.S. S2\; N.L.R.B. v. V. C. Britton Co., 352 F.2d 797, 798-799 (C.A. 
9); N.L.R.B. v. Security Plating Co., supra, 356 F.2d at 12%; N.L.R.B. v. 
Parma Water Lifter, supra, 211 F.2d at 262; Surprenant Mfg. Co. v. 
N.L.R.B., supra, 341 F.2d at 760-761. 

Also coercive was the repeated theme in the Company's election cam- 
paign that three named tool and die shops in the area— Mars, Alba and 
Falco— had closed because the Union won representation there. These 
assertions did not involve predictions of any sort. The Company simply 
characterized past events as fact. The implication, however, was plain that 
the Company would shut down just as its competitors had if the em- 
ployees selected the Union. Unsupported statements to employees that 
other plants have closed because of union representation are unlawful 
veiled threats that the Company will do likewise. N.L.R.B. v. Realist, 
Inc., supra, 328 F.2d at 843; Surprenant Mfg. Co. v. N.L.R.B., supra. 
341 F.2d at 761; Gotham Shoe Mfg. Co., 149 NLRB 862, 869-870, 
enforced, 359 F.2d 864, 865 (C.A. 2). Here, as the Examiner found (R. 



22 

30), the Company had no factual or legal basis for making such statements. 
Vice-President Fink, who was responsible for the statements, admitted he 
had no knowledge of why the three area plants had closed (R. 30; Tr. 890, 
892).^^ In these circumstances, the Company is not entitled to the pro- 
tection of Section 8(c). In determining whether a statement amounts to 
an implied threat or a protected prediction of events outside the Com- 
pany's control, the Board may properly consider whether "the utterer had 
some reasonable basis for it." International Union of Electrical Workers 
V. N.L.R.B., supra, 289 F.2d at 762-763. Accord: N.L.R.B. v. Miller, 341 
F.2d 870, 872-873 (C.A. 2); N.L.R.B. v. Joseph Antell Inc., 358 F.2d 
880, 881 n. 1 (C.A. 1); and see, N.L.R.B. v. Harrah's Club, 362 F.2d 425 
(C.A. 9), cert, denied, 386 U.S. 915, enforcing 150 NLRB 1702, 1717- 
1720. 

Nor can the Company's other statements, raising as issues in the 

Union campaign its ability to stay in business, the possibility of losing 

customers and job security (Br. 87, supra pp. 9-1 1 ) be viewed in a vacuum. 

As the Seventh Circuit has stated {N.LR.B. v. Kropp Forge Co., 178 F.2d 

822, 828-829, cert, denied, 340 U.S. 810): 

In determining whether such statements and expressions 
constitute, or are evidence of unfair labor practice, they 
must be considered in connection with the positions of 
the parties, with the background and circumstances under 
which they are made, and with the general conduct of the 
parties. If, when so considered, such statements form a 



Fink later testified to hearsay statements from former employees of two of the 
companies "quite some time ago" that the companies closed because of the Union (Tr. 
990-993). Nor did the Company call any witness to substantiate the claim made in a 
letter to employees-solicited by the Company and purportedly sent by the former 
president of Falco-that Falco had closed because of the Union (R. 30). 



23 

part of a general pattern or course of conduct which con- 
stitutes coercion and deprives the employees of their free 
choice guaranteed by section 7, such statements must still 
be considered as a basis for a finding of an unfair labor 
practice. 

As shown above. Company based a good deal of its anti-union campaign 
upon unsupported or unexplained facts as to union-caused shutdowns 
elsewhere. Moreover, in view of the Company's other coercive conduct, 
the employees could readily discern the Company's ability and intent to 
carry out its "predictions." In these circumstances the Board could 
properly discount subtle attempts to shift responsibility for inherently 
management-controlled consequences to unreasonable union demands or 
union-caused strikes and inefficiency, and conclude that they constituted 
unlawful threats of economic reprisal. See, Surprenant Mfg. Co. v. 
N.L.R.B., supra, 341 F.2d at 16\\N.L.R.B. v. Louisiana Mfg. Co., 31 A 
F.2d 696, 702-703 (C.A. 8); N.L.R.B. v. Kolmar Laboratories, supra, 387 
F.2d at 836-838; N.L.R.B. v. Sinclair Co., supra, 68 LRRM at 2722; 
Wausau Steel Corp. v. N.L.R.B., 311 F.2d 369, 371 (C.A. 7); Corrie Corp. 
of Charleston v. N.L.R.B., 375 F.2d 149, 153 (C.A. 4); Irving Air Chute 
Co. V. N.L.R.B., 350 F.2d 176, 180 (C.A. 2). 

Cases cited by the Company (Br. 87-88) such as N.L.R.B. v. TRW 
Semiconductors, Inc., supra, 385 F.2d 753 and N.L.R.B. v. Golub Corp., 
388 F.2d 921 (C.A. 2), where there were no other violations of the Act 
found, are manifestly not in point. Here it was reasonable for the Board 
to consider the Company's statements of loss of jobs and plant shutdown 
in the context of its other unlawful activity, as well as the circumstances 
surrounding the statements themselves. The line between lawful speech 
and unlawful threats may be close, but "one who engages in brinksman- 



24 

ship may easily overstep and tumble into the brink." Wausau Steel Corp. 

V. N.L.R.B., supra, 377 F.2d at 372. 

II. 

SUBSTANTIAL EVIDENCE ON THE WHOLE RECORD SUPPORTS 
THE liOARD'S FINDING THAT THE COMPANY DOMINATED 
AND INTERFERED WITH THE EMPLOYEE GRIEVANCE COM- 
MITTEE IN VIOLATION OF SECTION 8(a)(2) AND (1) OF THE 
ACT 

We submit that the evidence amply shows that the Company domi- 
nated and interfered with the formation and administration of the em- 
ployee Grievance Committee in violation of Section 8(a)(2) and (1) of the 
Act.^^ Far from being de minimis, as the Company asserts in its brief (Br. 
93), the overwhelming evidence of Company interference and domination 
herein shows a callous disregard of employee rights and of the "un- 
hampered freedom of choice which the Act contemplates" I. A.M. v. 
N.L.R.B., 311 U.S. 72, 80. Indeed, the Company's grip on employees 
through the Grievance Committee remained intact and had its obvious 
intended effect throughout the critical period of the Union's demand, the 
Company's refusal to bargain and the election carnpaign. 

Although, as the Company concedes, there was indeed a "closeness 
in time" (Br. 93) between the formation of the Committee and election, 
the evidence shows much more. As shown above (supra, pp. 6-7) the 
Committee became active and began functioning immediately after the 
Company suggested it and employee representatives were elected the same 



Section 8(a)(2) makes it an unfair labor practice for an employer: 

to dominate or interfere with the formation or administration of any 
labor organization or contribute financial or other support to it: Pro- 
vided, That subject to rules and regulations made and published by 
the Board pursuant to section 6, an employer shall not be prohibited 
from permitting employees to confer with him during working hours 
without loss of time or pay; . . . 



25 

day. The night supervisor presided over the selection of some employee 
representatives. Management decided when meetings would be held and 
notified the employee representatives. The meetings were held on Com- 
pany property, employees were paid for attending, and management took 
minutes of the meetings and distributed them. The Committee never met 
independently outside the presence of management and it had no consti- 
tution or by laws; nor did it collect dues. This evidence fully supports the 
Board's finding of a violation. See, N.L.R.B. v. Cabot Carbon Co., 360 
U.S. 203, 2\3-2\4; American President Lines, Ltd. v. N.L.R.B., 340 F.2d 
490 (C.A. 9); N.L.R.B. v. H & H Plastics Mfg. Co., 389 F.2d 678, 680-681 
(C.A. 6); N.L.R.B. v. Buitoni Foods Corp., 298 F.2d 169, 173 (C.A. 3); 
N.L.R.B. V. Standard Coil Products, 224 F.2d 465 (C.A. 1), cert, denied, 
350 U.S. 902; N.L.R.B. v. Philamon Laboratories, 298 F.2d 176, 181 (C.A. 
2), cert, denied, 370 U.S. 919. Furthermore, at the meetings, employees 
were invited to suggest changes in terms and conditions of employment. 
Management officials discussed these proposals, promised improvements 
and in some cases made appropriate changes. The Company also made a 
point of notifying the employees of all items discussed at the meetings and 
told them that changes would be forthcoming. Thus, it can hardly be 
denied that the Company was "deahng with" the Committee as a labor 
organization within the meaning of the Act. N.L.R.B. v. Cabot Carbon 
Co., supra, 360 U.S. at 214.^-^ 



13 
The Company erroneously asserts (Br. 92) that it is "undisputed" that a com- 
mittee "similar" to the grievance committee existed prior to the onset of the Union. 
In support of this assertion the Company cites testimony of Vice-President Fink obvi- 
ously referring to the safety committee, whose aims were unrelated to the grievance 
committee. Fink later testified that he could not recall "any kind of committee" such 
as the grievance committee being in existence in the past (Tr. 884). 



26 

III. 

SUBSTANTIAL EVIDENCE ON THE WHOLE RECORD SUPPORTS 
THE BOARD'S FINDING THAT THE COMPANY VIOLATED 
SECTION 8(a)(3) AND (1) OF THE ACT BY DISCRIMINATORILY 
DISCHARGING EMPLOYEES ALFRED CANTRELL AND IRVING 
KLEIN FOR THEIR UNION ACTIVITIES 

As shown in the Counterstatement (supra, pp. 1 1-13), the Company dis- 
charged two of the leading union advocates, employees Al Cantrell and 
Irving Klein. The Board found that these employees were discharged for 
their union activities. The Company contended that they were terminated 
for cause. But this "self serving declaration is not conclusive; the trier of 
fact may infer motive from the total circumstances * * * " Shattuck 
Denn Mining Corp. v. N.L.R.B., 362 F.2d 466, 471 (C.A. 9). The ques- 
tion is one of fact and, if supported by substantial evidence, the Board's 
finding must stand even if the reviewing court would have decided the case 
differently de novo. Universal Camera Corp. v. N.L.R.B., 340 U.S. 474, 
488; Shattuck Denn Mining Corp. v. N.L.R.B., supra; Aeronca Mfg. Co. v. 
N.L.R.B., 385 F.2d 724, 727 (C.A. 9). 

Cantrell 
The Company discharged Al Cantrell who was identified as "the 
strongest Union man in the shop" {supra, p. 1 1) at the height of the election 
campaign. Supervisor Walter Payton called Cantrell a very "outspoken" 
union advocate (Tr. 167) and had reported him to Howland (Tr. 1198). 
Fink interrogated Cantrell about his union activities, trying to get Cantrell 
to supply him with names of employees who attended a recent union 
meeting {supra, p. 5). The Company contends that Cantrell was laid-off 
-not discharged-because of a reduction in his type of work (Br. 94). But 
Cantrell was never recalled from layoff status and, as a practical matter. 



27 

he was fired, abruptly and without notice or warning. In view of these 
circumstances and the Company's manifest anti-union hostility, the Board 
could well conclude that the Company discharged Cantrell for his union 
activities. See Aeronca Mfg. Co., supra, 385 F.2d at 728; Shattuck Denn 
Mining Corp. v. N.L.R.B., supra, 362 F.2d at 471; N.L.R.B. v. Melrose 
Processing Co., 351 F.2d 693, 699-700 (C.A. 8).^^ 

The Company's explanation for Cantrell's termination "fails to with- 
stand scrutiny" and further supports the inference of discrimination. 
N.L.R.B. V. Dant & Russell, 207 F.2d 165, 167 (C.A. 9). As the Board 
found (R. 68), the evidence refutes any suggestion that there was a 
decrease in work at the time of Cantrell's discharge. He was working a 54 
hour week and most of the employees were working substantial overtime 
even after the discharge (R. 68; Tr. 1198-1200, 133, 138, 1697-1698, 145- 
146). The Company apparently recognizes this anomaly and counters that 
it needed jig-bore machinists and Cantrell did not fit the bill (Br. 94). But 
the Company offered a jig-bore job to Cantrell in January, 1965, before 
the start of union activity in the shop, because he was a good machinist; 
at that time, Cantrell dechned the job because he preferred to remain 
where he was (R. 68; Tr. 136, 177, 1182). When he was laid off, osten- 
sibly for lack of work, the Company was running a newspaper ad for a jig 
bore machinist (R. 68; Tr. 132-135). The ad made no reference to experi- 



Of course, it is no defense to a charge of discrimination, as the Company con- 
tends (Br. 94-95), that it did not fire all the union adherents or that it discharged oth- 
ers who were non-union. See N.L.R.B. v. Shedd-Brown Mfg. Co., 213 F.2d 163, 174- 
175 (C.A. l)\Nachman Corp. v. N.L.R.B., 337 F.2d 421, 424 (C.A. 7). It is significant, 
however, that employee Victor Stone, who was laid off at the same time as Cantrell 
(Br. 95) was, unlike Cantrell, recalled or rehired in July 1965 (Tr. 1315-1317). Stone 
had not signed a Union card (see Company Brief, p. 10) and there is no evidence in the 
record that he was in any way active on behalf of the Union. 



28 

ence being required (GCX 26, 27). Nevertheless, the Company did not 
offer the open spot to Cantrell even though he testified without contra- 
diction that he told Fink that he had jig-bore experience and wanted the 
job (Tr. 139, 174-175).^-^ The Company's suggestion (Br. 95-96) that its 
failure to offer him the job could have been due to the fact that he turned 
it down earlier misses the mark. In January, Cantrell was permitted to 
turn down the job, which offered him no immediate increase in pay (Tr. 
143) and still remain employed; but in June he was terminated without 
even being offered the open spot. The significant intervening factor was, 

of course, Cantrell's union activity. 

Klein 

The evidence also amply supports the Board's finding that the Com- 
pany discriminatorily discharged Irving Klein. He had initiated the union 
campaign among Company employees in mid-February, 1965 (Tr. 270). 
When he was notified by Union Representative Sloan of the industry-wide 
organizational campaign, Klein began to solicit union support at the shop; 
he attended union meetings, solicited authorization cards and was "very 
active" in the election campaign (Tr. 270-271). The Company knew of 
his activities. Both Rowland and Klein testified that, in one conversation 
between them, Howland told Klein that he did not look like a "paid" or 
"professional" organizer {supra, p. 12). The Board could properly give 
this conversation its plain meaning (R. 67) despite the Company's sugges- 
tion that Howland could have been "jesting" (Br. 97). Indeed, Howland 
thought enough of Klein's pro-union influence on employees that he 

^•^Nor was Cantrell offered any other job although the Company had other 
work. In addition to the continued use of overtime, the Company had a standing offer 
of a $50 bonus to employees who recruited skilled machinists (R. 68; Tr. 177, 1 197). 
It seems unlikely, under ordinary circumstances, that the Company would have perma- 
nently released a skilled machinist like Cantrell, who was hired as a general machinist 
and could operate several different types of machines (Tr. 137, 140-143). 



29 

approached or interrogated him about the Union on at least two other 
occasions (supra, p. 12). 

Klein was discharged shortly after the election and after the Union 
had filed objections to overturn it. His discharge at this time assured the 
Company of not having to contend with him in a second election cam- 
paign and made abundantly clear the Company's refusal to tolerate union 
activity among remaining pro-union employees. The discharge thus "dis- 
courage[d] membership in any labor organization." Section 8(a)(3). In 
view of the Company's pervasive unfair labor practices, the possibility of 
a second election was in no way remote, as suggested by the Company in 
its brief (Br. 96). The Board is not required to close its eyes to the 
effects of discriminatory employer action subsequent to a union's election 
defeat. See,N.L.R.B. v. Ralph Printing & Lithographing Co., 379 F.2d 687, 
693 (C.A. S)J^ 

The Company's claim that Klein was discharged for poor production 
does not "ring true" (Biirk Bros. v. N.L.R.B., 117 F.2d 686, 687 (C.A. 3), 
cert, denied 313 U.S. 588); see Shattuck Denn Mining Corp. v. N.L.R.B., 
supra, 362 F.2d at 471. Just three months before, it gave him a 15^ raise 
and Rowland told him he was a "top man" (R. 35; Tr. 294). Thereafter 
Howland told Klein, a veteran toolmaker with twenty-three years of exper- 
ience, not to worry about certain so-called profit and loss statements, 
which the Company now contends form the basis for Klein's discharge (Br. 
98). Howland also told Klein that "the way the company delegates jobs. 



^"^In that case, the employer announced wage increases subsequent to an election 
in which the Union had been defeated but before objections had been filed; and it 
granted the increases while the objections were pending. The Eighth Circuit found this 
conduct unlawful because it created the impression that further benefits would be 
forthcoming "if there were a continued rejection of unionization." 379 F.2d at 692. 



30 

they either make or break a man by giving him a job that was close or not 
close-timewise ..." (R. 36-37; Tr. 295-297).^^ Rowland's assurances to 
Klein show that the Company put little stock in the profit and loss state- 
ments, at least as they applied to the type of jobs "delegated" to Klein. 
Rowland was apparently more concerned with the quahty of the work of 
an experienced toolmaker like Klein than with his speed. The evidence is 
clear that Klein was never criticized about the quality of his work (R. 37; 
Tr. 318-319, 297-298). Moreover, the Company did not rebuke or dis- 
charge Klein in December 1964 when, as the Company states in its brief, 
"the majority of his jobs were losses" (Br. 98). Obviously, Klein "became 
intolerable" only after the onset of the Union on whose behalf he actively 
campaigned. See, N.L.R.B. v. Elias Bros. Big Boy, Inc., 325 F.2d 360, 
366 (C.A. 6). 

IV. 

SUBSTANTIAL EVIDENCE ON THE RECORD AS A WHOLE 
SUPPORTS THE BOARD'S FINDING THAT THE COMPANY VIO- 
LATED SECTION 8(a)(5) AND (1) OF THE ACT BY REFUSING 
TO BARGAIN COLLECTIVELY WITH THE UNION 

Section 8(a)(5) of the Act requires an employer "to bargain collectively 
with the representatives of his employees, subject to the provisions of Sec- 
tion 9(a)." That section provides that "Representatives designated or 
selected for the purpose of collective bargaining by the majority of the 
employees in a unit appropriate for such purposes, shall be the exclusive 

^''The Board found that the statements do not accurately measure production. 
According to the Company's sytem, each job assigned to a tool maker like Klein is 
estimated in terms of hours and costs. Other employees may work on the job for spe- 
cial cutting or boring operations, but the tool maker who is assigned the job is charged 
with all time spent in completing the project. The difference between the estimated 
and actual cost represents profit or loss. As the Examiner found, the statements do 
not account for low estimates or delays by workers other than the tool maker assigned 
the job. (R. 36; Tr. 1130, 1189-1191, 1256-1259, 1264, 1284,287-293,322). Thus, 



31 

representatives of all the employees in such unit * * * ." Although under 
Section 9(c)(,l) the Board conducts elections to determine representative 
status, it has long been settled that such status may be shown by other 
means. See, United Mine Workers v. Arkansas Oak Flooring Co., 351 U.S. 
62, 71-72. Thus, when a majority of employees in an appropriate unit 
sign union authorization cards, an employer violates Section 8(a)(5) if he 
refuses to recognize or bargain with the union and such refusal is not 
motivated by a good faith doubt of the union's majority. N.L.R.B. v. 
Luisi Truck Lines, supra, 384 F.2d at 846-847 (C.A. 9); N.L.R.B. v. Secur- 
ity Plating Co., 356 F.2d 725, 726-727 (C.A. 9); Sakrete of Northern Cali- 
fornia, Inc. V. N.L.R.B., 332 F.2d 902, 908-909 (C.A. 9), cert, denied, 379 
U.S. 961; Snow v. N.L.R.B., 308 F.2d 687, 691, 694 (C.A. 9); N.L.R.B. 
V. Trimfit of California, Inc., 211 F.2d 206, 209-210 (C.A. 9); N.L.R.B. v. 

Atco Surgical Supports, Inc., __ F.2d , 68 LRRM 2200, 2201 (C.A. 

6, decided May 10, \96S), N.L.R.B. v. Goodyear Tire & Rubber Co., 

F.2d , 68 LRRM 2137, 2137-2138 (C.A. 5, decided May 6, 1968). 

In such circumstances a bargaining order is the appropriate remedy. 

As the Fifth Circuit recently stated {N.L.R.B. v. Goodyear Tire & Rubber 

Co., supra): 

[Sjuch an order is clearly within the Board's discre- 
tion, especially when the employer has engaged in unfair 
labor practices such as is the case here. [Citations 
omitted.] It is equally so where the employer takes the 
bold course of refusing to bargain as the means of testing 
representation of a majority. Even more so is it when 
this intransigence flows from an inflexible company 
policy of ignoring authorization cards and insisting on a 
Board election as the price for bargaining. Of course the 



the fact that several days before Klein's discharge Foreman Isak told him that he was 
not planning his jobs properly is of no particular consequence. Isak accepted Klein's 
answer that he could not be responsible for the hours used by other employees (R. 26; 
Tr. 281-282). 



32 

fact that the Union's majority may have been dissipated 
during the pendency of the present action affords no 
defense to the employer. Such reasoning would allow 
the employer to profit by his own wrongdoing and 
would encourage, not discourage, the very activities 
which the law so plainly forbids. 

Accord: N.L.R.B. v. Gordon Mfg. Co., __ F.2d , 68 LRRM 2457, 

2458 (C.A. 6, decided, June 6, 1968). These principles also apply where 
the union, after its card majority is rejected by an employer, chooses to 
go to an election which is invalidated because of employer misconduct. 
Bernel Foam Products, Inc., 146 NLRB 1277; Master Transmission 
Rebuilding Corp. v. N.L.R.B., 373 F.2d 402 (C.A. 9); N.L.R.B. v. Luisi 
Truck Lines, supra, 384 F.2d at 845, 847; N.L.R.B. v. Southbridge Sheet 
Metal Works, Inc., 380 F.2d 851, 853 (C.A. 1); Irving Air Chute Co. v. 
N.L.R.B., 350 F.2d 176, 182 (C.A. 2); N.L.R.B. v. Frank C. Varney Co., 
359 F.2d 774, 775-776 (C.A. 3). As these cases illustrate, where an elec- 
tion has been rendered an imprecise indicator of employee choice because 
of an employer's misconduct, the Board may properly determine union 
support by the only means possible at or near the time of the bargaining 
demand and provide a remedy for the employer's misconduct. 

We show below that a majority of the employees had selected the 
Union; that the Company's refusal to bargain was not motivated by a good 
faith doubt of majority status; and that, in the circumstances of this case, 
the Board properly ordered the Company to bargain with the Union. 

A. The Union represented a majority of the employees 

The Union's majority status as of March 12, 1965, when it requested 
recognition, is established by authorization cards signed by 68 of the 1 14 
or 115 employees in the concededly appropriate unit (supra, p. 8). In 
responding to the Union's demand the Company stated that it had "no 



33 
knowledge of the authenticity of any authorization cards that you claim 
to have or the circumstances under which they may have been obtained" 
(supra, p. 9). However, at the hearing, the Company challenged the 
Union's majority on the grounds that three of the cards were not properly 
authenticated and, secondly, that some employees were induced to sign 
their cards by misrepresentations of their purpose attributable to Union 
solicitation. Both of these attacks, we submit, were properly rejected by 
the Board. 

1. The authenticity of the cards of Anathaiwongs, 
Doebler, and Meier 

Initially, the Company objects to the introduction into evidence of 
the cards of employees Anathaiwongs, Doebler, and Meier (Br. 1 1 ). These 
employees were unavailable at the time of the hearing (Tr. 1739-1740). 
Their cards were authenticated, as were others, by a handwriting expert. 
In addition, the authenticity of these cards was established by the undis- 
puted testimony of other witnesses. It is settled law that authorization 
cards may be authenticated by such means. N.L.R.B. v. Howell Chevrolet 
Co., 204 F.2d 79, 85-86 (C.A. 9), affd on other grounds, 346 U.S. 482; 
N.L.R.B. V. Howard Cooper Corp., 259 F.2d 558, 560 (C.A. 9); N.L.R.B. 
V. Sunshine Mining Co., 110 F.2d 780, 790 (C.A. 9), cert, denied, 312 
U.S. 678; Colson Corp. v. N.L.R.B., 347 F.2d 128, 134 (C.A. 8), cert, 
denied, 382 U.S. 904. 

The handwriting expert testified that the signature and date on the 
card of Anathaiwongs corresponded with the signature on his cancelled 
checks and insurance data (Tr. 191-192, 193-194), although the expert 
had no opinion as to whether it also corresponded with the writing on 
Anathaiwongs' W-4 form (Tr. 250). However, employee Homnan testified 
that Anathaiwongs gave him a card, explained its purpose and filled it out 



34 

for him; he further testified that Anathaiwongs filled out his own card in 
Homnan's presence (Tr. 491-492), and told him that he would send both 
cards to the Union (Tr. 499). The handwriting expert was unable to 
authenticate Doebler's card because he did not have adequate samples with 
which to compare it (Tr. 204-205). But employee Irving Klein testified 
that he gave Doebler a card in early March (Tr. 305) and "noticed the 
card was filled out and completely signed" when it was returned to him 
(Tr. 307). The card is dated March 2, 1965 (GCX 55). Finally, it is 
undisputed that Meier, whom the Company knew to be "for" the Union 
at the time of the demand (RX 7), signed his card. Although the Com- 
pany questions the date (Br. 12, n. 6), the card bears the date of February 
28, the day of the first union meeting at which many employees signed 
cards (GCX 76). In contrast, "[T]here is nothing in the record to indicate 
there was any irregularity in connection with . . . [these cards]" N.L.R.B. 
V. Luisi Truck Lines, supra, 384 F.2d at 846, n. 3. Accordingly, they 
were properly received and counted by the Board. ^^ 



TO 

The Company also claims (Br. 13) that it should have been permitted to impeach 
tlie qualifications of the General Counsel's handwriting expert by cross-examining him 
as to the authenticity of other signatures unrelated to his direct testimony. But the 
Company conceded the expertness of the witness at the hearing (Tr. 257). Company 
counsel thoroughly cross-examined the witness and even introduced the testimony of 
another handwriting expert for impeachment purposes. In these circumstances, the 
Trial Examiner could properly limit the scope of the cross-examination. The discretion 
of the Examiner in this respect is not to be disturbed absent a "strong showing" of 
prejudice. N.L.R.B. v. Phaostrom Instrument & Electronic Co., 344 F.2d 855, 857-858 
(C.A. 9). In any event, even assuming that the Examiner's ruling was erroneous, the 
Company has not shown prejudicial error, since, as we have shown above, the authen- 
ticity of the three cards contested by the Company was established by other testimony. 
Furthermore, the Company did not come forward with any evidence which disputed 
such testimony. 



35 
2. The validity of the cards 
The cards herein unambiguously state in bold letters, "Authorization 
to UAW," and further state that the signer "authorizes the Union to repre- 
sent [him] in collective bargaining" {supra, p. 8, n. 4). Although the 
cards themselves make no mention of an election, the Company alleges 
that statements made to employees concerning a possible election negated 
the clear purpose stated on the cards and therefore warranted rejection of 
the card. However, it is clear that a card may be used for more than one 
purpose, such as, for example, to obtain a Board election. Section 9(c)(1) 
(A) of the Act provides that the Board will investigate an election petition 
filed by a union when it alleges that a "substantial number of employees 
wish to be represented for collective bargaining and that their employer 
declines to recognize their representative. . . ." The Board has concluded 
that it will conduct an election on a union's petition only if it "has been 
designated by at least 30 percent of the employees." Statements of Pro- 
cedure of NLRB, Series 8, as amended. Section 101.18(a). Therefore, it 
is proper for a Union to state that a card may be used to obtain an elec- 
tion, for that is a correct statement of the law. As the Sixth Circuit has 
said, "[T]he signing of authorization cards [is] an essential preliminary to 
a union petition for an election"; and representations to that effect are 
truthful where the Union "did indeed seek an election." N.L.R.B. v. Cum- 
berland Shoe Corp., 351 F.2d 917, 920; United Automobile Workers (Pres- 
ton Products Co) V. N.L.R.B., 392 F.2d 801, 807, n. 1 (C.A. D.C.), cert, 
denied, 68 LRRM 2408 (June 10, 1968). See also, Atlas Engine Works, 
Inc. V. N.L.R.B., 68 LRRM 2635, 2636 (C.A. 6, decided June 28, 1968).^^ 

There is no inconsistency in the fact that a union seeks a Board election on the 
basis of cards, notwithstanding it already has a majority and the employer, as here, has 
refused to bargain with it. See, e.g., N.L.R.B. v. Security Plating Co., 356 F.2d 725, 



36 

In order to invalidate a clear and unambiguous authorization card, it 
must be shown that the card was signed because of misrepresentations, 
attributable to the union, that the only purpose of the card was for an 
election, i.e., where the representations contradict the clear language of the 
cards. United Automobile Workers (Preston Products Co.) v. N.L.R.B., 
supra, 392 F.2d at 807 (C.A. D.C.); Amalgamated Clothing Workers of 
America (Hamburg Shirt Corp.) v. N.L.R.B., 371 F.2d 740, 745 (C.A. 
D.C.);N.L.R.B. v. Southbridge Sheet Metal Works, Inc., supra, 380 F.2d 
851 at 855-856; Fwrr '5, Inc. v. N.L.R.B., 381 F.2d 562, 567-568 (C.A. 10), 
cert, denied, 389 U.S. 840; Englewood Lumber Co., 130 NLRB 394, 395. 
See also, Bryant Chucking Grinder Co. v. N.L.R.B., 389 F.2d 565, 568 
(C.A. 2), cert, denied, 68 LRRM 2408 (June 10, 196%); N.L.R.B. v. Swan 
Super Cleaners, Inc., 384 F.2d 609, 618 (C.A. 6); and N.L.R.B. v. Dan 
Howard Mfg. Co., 390 F.2d 304, 309 (C.A. 7).^^ 

Moreover, the employer bears the burden of establishing by clear and 
convincing evidence the existence of misrepresentations which would viti- 
ate unambiguous cards. "A morass of hazy individual recollections of 
attendant circumstances will not suffice" Amalgamated Clothing Workers 



111 iZ.k. 9); Irving Air Chute Co. v. N.L.R.B., 350 F.2d 176, 182 (C.A. 2). The elec- 
tion route is less costly and time consuming than an unfair labor practice proceeding. 
Moreover, a union, certified after a Board election, enjoys special benefits not available 
to unions recognized by other means such as protection of its representative status for 
1 year (see Ray Brooks v. N.L.R.B., 348 U.S. 96) and protection from raids from rival 
unions (see Section 8(b)(4)(C) and 8(b)(7) of the Act). 

^^Contrary to the thrust of the Company's brief on this point (Br. 19-35), the 
courts have, on the whole, accepted the Board's view as to what amounts to misrepre- 
sentation. In Cumberland Shoe Corp., 144 NLRB 1268, enforced, 351 F.2d 917 (C.A. 
6), the Board held that clear cards would be vitiated only if the solicitor indicated to 
the signer that the card would be used only for an election. As shown above, the Dis- 
trict of Columbia, First, and Tenth Circuits have accepted the rule. Three other 
circuits-the Second, Sixth, and Seventh-have also approved the rule, but, in subsequent 



37 

(Hamburg Shirt Corp.) v. N.L.R.B., supra, 371 F.2d at 745; N.L.R.B. v. 

Southbridge Sheet Metal Works, Inc., supra, 380 F.2d at S55; N.L.R.B. v. 

Glasgow Co., 356 F.2d 476, 478 (C.A. 7); N.L.R.B. v. Gordon Mfg. Co., 

supra, 68 LRRM at 2458 ("positive" misrepresentation needed); and see, 

N.L.R.B. V. Security Plating Co., supra, 356 F.2d at 126-121; N.L.R.B. v. 

Geigy Co., supra, 211 F.2d at 556; Matthews & Co. v. N.L.R.B., 354 F.2d 

432, 436-438 (C.A. 8), cert, denied, 384 U.S. 1002; Furr's, Inc. v. 

cases, have rejected reliance upon use of the words "sole" or "only" for an election. 
These circuits hold that misrepresentation is shown by "words . . . clearly calculated to 
create in the minds of the one solicited a belief that the only purpose of the card is to 
obtain an election." N.L.R.B. v. Swan Super Cleaners, Inc., supra; see N.L.R.B. v. Dan 
Howard Mfg. Co., supra; Bryant Chucking Grinder Co. v. N.L.R.B., supra; (compare 
opinion of Judge Hays with that of Judge Friendly discussing his opinion in N.L.R.B. 
V. Nichols, 380 F.2d 438 (C.A. 2), relied on by the Company (Br. 21)). See also, 
N.L.R.B. V. Consolidated Rendering Co., 386 F.2d 699, 703 (C.A. 2). The Board has 
recently affirmed its Cumberland Shoe rule while making clear that the rule was never 
intended to be a mechanical one. "It is not the use or non use of certain key or 
"magic" words that is controUing, but whether or not the totality of the circumstances 
... is such, as to add up to an assurance to the card signer that his card will be used 
for no purpose other than to help get an election." Levi Strauss & Co., 172 NLRB 
No. 57, 68 LRRM 1338, 1341-1342; see also McEwen Mfg. Co., 172 NLRB No. 99, 
68 LRRM 1343, 1349-1351. 

The Company also relies on cases from the Fourth and Fifth Circuits which have 
apparently rejected the Cumberland rule. See, Engineers & Fabricators, Inc. v. N.L.R.B., 
376 F.2d 482, 486-487 (C.A. 5); and Crawford Mfg. Co. v. N.L.R.B., 386 F.2d 367 
(C.A. 4), cert, denied, 390 U.S. 1028. But these cases do not hold that the mere men- 
tion of an election vitiates clear cards. In Crawford, as the court stated (id. at 371), 
the "findings of the examiner . . . make an issue of whether . . . the cards were signed 
solely to procure an election." Indeed, the Fifth Circuit has recently stated that its 
position "does not seem to differ from" N.L.R.B. v. Swan Super Cleaners, supra. 
N.L.R.B. V. Lake Butler Apparel Co., 392 F.2d 76, 82. See also, N.L.R.B. v. Phil- 
Modes, Inc., _ F.2d , 68 LRRM 2380, 2381 (C.A. 5). As for the denial of cer- 
tiorari in Crawford, emphasized by the Company (Br. 29), we point out that the Su- 
preme Court has recently denied certiorari in Bryant Chucking Grinder and Preston 
Products also. 

This circuit has no cases directly on point, although one such case which presents 
the issue is now pending before the Court {N.L.R.B. v. South Bay Daily Breeze, No. 
21,949). 



38 

N.L.R.B., supra; Bryant Chucking Grinder Co. v. N.L.R.B., supra. Of 
course, the Company must show not only the existence of a misrepresen- 
tation but also responsibility of the Union and reliance upon such misrep- 
resentation by the employee. ^^ 

The Company's contention that the authorization cards herein were 
signed because of misrepresentations by the Union is completely at odds 
with the record. The evidence relied on by the Company— union- 
distributed circulars; discredited testimony concerning Union representative 
Sloane's remarks at a union meeting; and other testimony, some dis- 
credited, as to individual solicitation of employees— falls far short of 
meeting its burden of proof on this issue. In short, there is no clear 
showing by competent evidence that employees signed cards in reliance 
upon Union representations, contradicting the plain authorization language 
of the cards, that the only purpose of the cards was for an election. 

At the outset, the Company has not shown that the card signers 
relied on statements in the union circulars when they signed their authori- 
zations. Such reliance is a necessary element of the Company's proof. See 
Bryant Chucking Grinder Co. v. N.L.R.B., supra, 389 F.2d at 571 (concur- 
ring opinion of Judge Friendly). Nearly all of the employees here had 
signed their cards before the issuance of the circulars, which were dated, 
as the Company states (Br. 37, 38), on March 3, 10, and 14; the circulars 



•^^The Company seems to suggest that the General Counsel has the burden of 
proof on this issue (Br. 30). But the case it cites to support its contention, N.L.R.B. v. 
Lake Butler Apparel Co., supra, 392 P. 2d at 81-82, shows only that once the party 
attacking the cards makes a prima facie showing of misrepresentation, the burden of 
persuasion shifts to the General Counsel. We read Crawford v. N.L.R.B., supra, 386 
F.2d 367 (C.A. 4) in the same manner. See also, concurring opinion of Judge Friendly 
in Bryant Chucking Grinder Co. v. N.L.R.B., supra, 389 F.2d at 570-571. 



39 

could not have influenced employees who had already signed cards. In any 
event, the circulars properly stated the Union's approach in organizing 
industry-wide and they referred to the signing of authorization cards. The 
Union's "intention to petition [for election] for each shop at the point 
where a substantial majority of the shop employees have signed and mailed 
in their Authorization Cards" (RX 4) does not contradict the meaning of 
signed cards clearly authorizing the Union to bargain and it correctly rep- 
resents the law. Moreover, here the Union did in fact petition for an elec- 
tion seeking certification when the Company rejected its card majority. 
(See discussion and authorities cited supra, pp. 35-36, and n. \9)P 

The Company also attempts (Br. 40-46) to overturn the Trial Exami- 
ner and the Board's resolution of conflicting testimony. They credited the 
testimony of Union representative Sloane as to his remarks at a union 
meeting on February 28, 1965 (R. 24-25, 29). The Company thus under- 
takes a heavy burden, since credibility determinations are peculiarly within 
the province of the Trial Examiner and the Board and will not be over- 
turned except in extraordinary circumstances. N.L.R.B. v. Walton Mfg. 
Corp., 369 U.S. 404, 407-408; N.L.R.B. v. Luisi Truck Lines, supra, 384 
F.2d at 846 (C.A. 9); N.L.R.B. v. Stanislaus Implement & Hardware Co., 
226 F.2d 377, 381 (C.A. 9). Sloane testified that he told employees that 



^^The Company's reliance (Br. 59-64) on Bauer Welding & Metal Fabricators, Inc. 
V. N.L.R.B., 358 F.2d 766 (C.A. 8), is misplaced. Unlike here, the union campaign was 
conducted "entirely by mail" (id. at 768), the cards were rendered ambiguous because 
they were attached to a letter to all employees which stated in "plain terms" that the 
cards "would only authorize [the Board] to conduct a secret election" (id. at 774) and 
the employees thereafter signed the cards. Here, the Union's circulars stated a lawful 
purpose for the cards and were distributed at a time when they could not have influ- 
enced the cards signed by the employees here, which were, in any event, clear on their 
face. See Bryant Chucking Grinder Co. v. N.L.R.B., supra, 389 F.2d at 571. Compare, 
Matthews & Co. v. N.L.R.B., supra, 354 F.2d at 436-438. 



40 

the Union would demand recognition on the basis of the cards, but that 
in all probabihty the Company would refuse to bargain and an election 
would be necessary {supra, pp. 3-4). He was corroborated by other testi- 
mony. Thus, employee Booze testified, "Mr. Sloane made the statement 
that if we had enough cards these cards would be presented to the Com- 
pany and the Company would turn it down, and at that time we would 
have an election" (Tr. 1433). Employee Williams testified that Sloane said 
the Union needed "30 per cent for an election and if they got 50 plus one, 
they didn't have to have an election" (Tr. 468). And employee Garger 
testified that Sloane said that "at least 30 or 33 per cent was required 
for an election" and he "had an idea" that Sloane said the Union could 
represent the employees without an election (Tr. 1518) (see also, Tr. 530- 
531). Contrary testimony cited by the Company at pp. 40-46 of its brief 
was discredited by the Examiner and the Board (see discussion and cases 
cited infra pp. 42-46). In these circumstances, the Board properly credited 
Sloane whose statements were correct representations of the law. See, 
N.L.R.B. V. Geigy Co., supra, 211 F.2d at 556; Matthews v. N.L.R.B., 
supra, 354 F.2d at 437; Atlas Engine Works, Inc. v. N.L.R.B., supra, 68 
LRRM at 2636. 

The Company's further attempt to show that individual Union soUci- 
tation vitiated all of the cards (Br. 46-51) or some of the cards (Br. 52-59) 
is patently without merit. The Company attacks 19 cards and since the 
Union's majority would remain intact if 58 of the 68 cards are valid, the 
Company must show that at least 10 were rendered invalid. However, 
many of the employees whose cards are attacked voluntarily attended 
one or more union meetings and thus were obviously much more inter- 
ested in the union than an employee, who, for example, may have 



41 

signed in the plant but never attended any meetings. ^-^ Moreover, in seve- 
ral cases (Polony, Christenson, Virgil), the testimony shows that statements 
about an election were made by unidentified persons or were the source 
of rumor in the plant (Tr. 1373-1374, 380-381, 1465), neither of which 
can be attributable to the Union so as to invalidate the cards. See 
Matthews v. N.L.R.B., supra, 354 F.2d at 431 -438 ; Fur r's, Inc. v. N.L.R.B., 
supra, 381 F.2d at 568, n. 14. 

In any event, the evidence cited by the Company does not show that 
the Union represented that the cards were only for an election and not for 
authorization. It must be pointed out that the employees read the author- 
ization cards or had them explained and that none of the employees asked 
the Union or its solicitors for the return of their cards after the recogni- 
tion request. -^^ In some cases (Booze, Cisneros, Cuda, Dellomes, Garger, 
Kofink, Lawrence, and Weymar) the cards were signed at the union 
meeting where Sloane properly explained the use of the cards (supra, 
p. 40). In others (Knowles, Homnan, and Virgil) the testimony indicates 
that the solicitor mentioned that the cards could be used for recognition, 
as well as an election— a truthful statement of the law.^-^ As to other 



^•^The Charging Party's Exhibit No. 2 lists some of these employees as having 
attended the March 14 meeting, after they signed their cards. 

^'^Contrary to the Company's brief (Br. 52, 55, 57, 58), the testimony of 
employees Proudfoot (Tr. 486), Dellomes (Tr. 1364-1366), Lawrence (Tr. 1483-1484), 
and Rhedin (Tr. 1450) shows that they did indeed read their cards before signing. 

Employee Knowles testified that he was told by the employee who solicited 
him that "he wanted to unionize the tool and die industry in Southern California and 
I told him 1 would . . . [and] as near as 1 can remember, we wanted an election for 
union representation" (Tr. 423). Employee Virgil testified that the person who gave 
him his card that it could be used "for either an election or . . . allowing the 
Union to come in" (Tr. 383). Employee Homnan, who was given a card by Anathai- 
wongs (supra, p. 33) testified he was not told of any election but simply that the card 
would allow "the Union [to] come in" (Tr. 499). 



42 

cards (Cheetham, Kuhmann, Proudfoot, Cuda, Vogl), the Company cites 
no evidence that solicitors made any representations to the employees 
whatsoever. ^"^ 

In view of the above, and his opportunity to pass on the demeanor 
of the witnesses, the Examiner properly discredited any testimony which 
might suggest that Union agents told employees that the only purpose of 
the cards was for an election (R. 29). See, Matthews v. N.L.R.B., supra, 
354 F.2d at 436-438; N.L.R.B. v. Security Plating, supra, 356 F.2d at 726- 

727; N.L.R.B. v. Consolidated Rendering Co., 386 F.2d 699, 702 (C.A. 

2).27 

Although the Company concedes that a showing of misrepresentation 
must be based upon "what was said" to employees (Br. 29), it is signifi- 



This leaves the cards of three employees (Garrett, Rhedin, and Christenson) 
concerning which there was testimony that the employees were told by an identified 
solicitor that the cards would be used to obtain an election. But the testimony does 
not show that they were told that the cards did not authorize bargaining, as stated on 
the cards or that the only purpose of the cards was for an election. See, Bryant 
Chucking Grinder v. N.L.R.B., supra, 389 F.2d at 568. For example, although Chris- 
tenson testified on direct that he was told the cards would be used for an election, on 
cross-examination, he attributed those statements to "conversation ... in the shop" 
(Tr. 1465). Garrett testified that the person who solicited him told him to do "what I 
thought was right" (Tr. 1420) and he signed the card in the "privacy of [his] home" after 
reading it (Tr. 1423). Rhedin could not recall all of what the solicitor told him (Tr. 
1452), but he too signed his card in private— at the noon break (Tr. 1453). See N.L.R.B. 
V. Consolidated Rendering Co., 386 F.2d 699, 702 (C.A. 2). Finally, even assuming 
that these three cards were invalid, they did not affect the Union's majority (id. at 
703). 

^'^Also rejected was testimony cited by the Company (Br. 48-49) as to the solici- 
tation of four other employees (Hunt, Mancini, Mansfield, and Mellone). These 
employees did not sign cards counted by the Board towards the Union's majority. 
Indeed Hunt testified he was told that the purpose of the cards was "getting a union in' 
the shop" (Tr. 1475). Mansfield's testimony referred only to unidenfified rumors of an 
election (Tr. 627). 



43 

cant that the Company relies upon testimony which reflects the subjective 
intent of card signers— over a year after the cards were signed, after an elec- 
tion campaign and after the employees had been subjected to coercive 
employer action. Such testimony is ordinarily not admissible, and may 
not be used to vitiate clear authorizations. For "an employee's thoughts 
(or afterthoughts) as to why he signed a union card and what he thought 
the card meant cannot negative the overt action of having signed a card 
designating a union as bargaining agent." Joy Silk Mills v. N.L.R.B., 185 
F.2d 732, 743 (C.A. D.C.), cert, denied, 341 U.S. 914.^"^ Testimony of 
this sort, even if it refers to what solicitors allegedly told employees, is 
suspect not only because of the passage of time but because an employer's 
unfair labor practices may have had their intended effect, namely, a 
change of heart by the card signers. ^^ As the District of Columbia Circuit 
recently observed: 

... we have here the classic case of employees testifying 
under the eye of the company officials about events which 
occurred almost a year before and prior to the activities 
which were subsequently found to constitute unfair labor 
practices. It is certainly conceivable that those same threats 
and benefits which shook an employee's original support 
for the union also altered that employee's memory as to 



^■^See also, N.L.R.B. v. Sunshine Mining Co., 110 F.2d 780, 790 (C.A. 9), cert, 
denied, 312 U.S. 678; N.L.R.B. v. Geigy Co., supra, 211 F.2d at 556; Matthews v. 
N.L.R.B., supra; N.L.R.B. v. Gotham Shoe Mfg. Co., 359 F.2d 684 (C.A. 2); N.L.R.B. 
V. Cumberland Shoe Corp., 351 F.2d 917, 920 (C.A. 6); N.L.R.B. v. Gordon Mfg. Co., 
supra, _ F.2d at _, 68 LRRM at 2458; N.L.R.B. v. Gorbea, Perez & Morell, 300 
F.2d 886, 887 (C.A. 1). But see,NL.R.B. v. Southland Paint Co., 68 LRRM 2169 
(C.A. 5); Crawford Mfg. Co. v. N.L.R.B., supra, 386 F.2d 367. 

^^See N.L.R.B. v. Bradford Dyeing Ass 'n, 310 U.S. 318, 339-340; Medo Photo 
Supply Corp. v. N.L.R.B., 321 U.S. 676, 681; N.L.R.B. v. Geigy Co., supra at 556; 
N.L.R.B. V. Quality Markets, Inc., 387 F.2d 20, 23 (C.A. 3); cf. Franks Bros. Co. v. 
N.L.R.B., 321 U.S. 702, 705. 



44 

events which occurred before the presentation of such 
threats and benefits. 

United Automobile Workers (Preston Products Co., Inc.) v. N.L.R.B., 
supra, 392 F.2d at 807-808. Accord: N.L.R.B. v. Southbridge Sheet Metal 
Works, supra, 380 F.2d at 855 (C.A. 1). See also, N.L.R.B. v. Sunshine 
Mining Co., 110 F.2d 780, 790 (C.A. 9), cert, denied, 312 U.S. 678. 

This rationale is particularly applicable here because the Company 
apparently undertook to induce favorable testimony as to the card sign- 
ings just 2 or 3 weeks before the hearing. On April 5, 1966, the Com- 
pany sent letters to all employees denouncing the anticipated use of the 
authorization cards at the Board hearing and stating, contrary to the law 
{supra, p. 35), that the "only true way" of determining union represen- 
tation was by a Board election (G.C. 23, Tr. 973). The Company also 
enclosed a questionaire, asking employees to indicate which of several 
reasons was the "true reason" they signed cards. None of the listed 
reasons was the one stated on the card— union authorization for bargain- 
ing (G.C. 23, Tr. 538-539, 510, 487, 641-642). On April 12, 1966, the 
Company sent another letter to employees, stating that the responses indi- 
cated that most employees did not even sign cards and those who did, did 
not intend to give the Union authorization to bargain, that they "were 
told that . . . the purpose of the cards" was to have an election (G.C. 24). 
Vice-President Fink, who sent the letter, admitted he had no knowledge 
of the truth of these representations (Tr. 978, 984-985, 973, 981). The 
letter also stated that the card signers would be questioned at the hearing 
as to "whether you were told by the Union . . . that the purpose was to 
have an election" (G.C. 24). In addition, Personnel Manager Berno 
approached several employees shortly before the hearing and questioned 



45 

them as to why they had signed cards (Tr. 367-370, 532-536, 639-642). 
Berno prepared a statement for employee Virgil to sign stating that he had 
signed a card "under pressure or a strain of some type"— which was clearly 
incorrect (Tr. 370). Another employee who "changed his mind" on the 
Union signed a statement, prepared by Berno, in Berno's office the night 
before he testified at the hearing (Tr. 532-533, 536). Such action by the 
Company, although not found to be a violation of the Act, undoubtedly 
affected the testimony of employees concerning the cards. It is the very 
same type of conduct which was condemned long ago by the District of 
Columbia Circuit in Joy Silk Mills v. N.L.R.B., supra, 185 F.2d at 743. 

In these circumstances, the Board was not required to place reliance 
upon any evidence suggesting that employees had second thoughts about 
their actions in signing plain authorization cards. As the Examiner pointed 
out (R. 29), these were intelligent employees who knew what they were 
signing and, as we have shown, there was no competent evidence that the 
cards were signed because of union misrepresentations of purpose which 
would vitiate the cards. The Company's solicitude for "employees' rights" 
in its brief to this Court (Br. 7) must sound hollow indeed to the employees 
who were subjected to the Company's misconduct. As Judge Sobeloff has 
stated, "'Crocodile tears' shed by an employer over the loss of his employ- 
ees' free and untrammeled choice after he has violated either Section 8(a)( 1 ) 
or (3) or both should not impress us." N.L.R.B. v. Sehon Stevenson & Co., 
386 F.2d 551, 557 (C.A. 4) (concurring opinion). "By the time of the 
hearing the employees may well have changed their mind with respect to 
union affiliation, but the crucial question ... is whether the union had 
the support of a majority of the employees ... at the time the [bargain- 
ing] request was made, and not whether that support remains intact some 



46 

ten months later." United Automobile Workers v. N.L.R.B., supra, 392 
F.2d at 808.-^^ 

B. The Company's refusal was not motivated by a 
good-faith doubt of the Union's majority 

It is settled that, while an employer may properly refuse to bargain 
with a union if it doubts in good faith that the union has the support of 
a majority of the employees, the alleged doubt must not only be based on 
reasonable grounds but it must be the real reason for the employer's 
refusal to recognize the union. N.L.R.B. v. Luisi Truck Lines, supra, 384 
F.2d at 847 (C.A. 9). Accord: N.L.R.B. v. Austin Powder Co., 350 F.2d 
973, 977 (C.A. 6); N.L.R.B. v. Quality Markets, 387 F.2d 20, 23-24 (C.A. 
3); Joy Silk Mills v. N.L.R.B., supra, 185 F.2d at 741-742 (C.A. D.C.). 
Here, as we show below, substantial evidence supports the Board's conclu- 
sion that the Company's refusal was not based on a good-faith doubt of 
the Union's majority but rather on a "desire to forestall collective bargain- 
ing and provide an opportunity to undermine the union's majority status 
and rid the Company of the union." N.L.R.B. v. Security Plating Co., 
supra, 356 F.2d at 727. 

As shown in the Counterstatement (supra, p. 9), the Company's 
response to the Union's demand indicated it had no knowledge concerning 
the circumstances under which the Union's cards "may have been ob- 



Nor are the cards of foreign-born or foreign-speaking employees invalid as such 
(Br. 65). N.L.R.B. v. Security Plating Co., supra, 356 F.2d at 726-727 (C.A. 9). Here, as 
in Security Plating, the employees either read the cards of had them explained (Tr. 502. 
562, 486, 552, 514, 497). Ail of the employees testified in English and most had 
been in this country for some time. 



47 

ained." Yet, the Company refused to bargain and also refused the 
Jnion's offer of a card check by an impartial third party. The Company 
hus "chose not to learn the facts [and] it 'took the chance of what they 
night be.'" Matthews v. N.L.R.B., supra, 354 F.2d at 439, quoting from 
IL.R.B. V. Elliott-Williams Co., 345 F.2d 460 (C.A. 7). The Board could 
)roperly find such evidence ''inconsistent with the assertion of good faith" 
IL.R.B. V. Ralph Printing & Lithographing Co., supra, 379 F.2d at 693.-^^ 

Also inconsistent with good faith was the Company's pervasive unlaw- 
ul activity which reveals a determination not to accept union representa- 
ion under any circumstances. As the Board found (R. 30), the Company 
'saw the Union as a threat to its way of dealing with its employees" and 
efused to accept "the thought that the employees might desire to have 
Jnion representation." As soon as it learned the Union was making head- 
i'ay in organizing its employees the Company sought to undermine it by 
janting wage increases and forming its own grievance committee so that 
iroblems could be solved "among ourselves" (Tr. 36). After it received 
/ord of the Union's majority it "continu[ed] to deal with the manage- 
nent dominated committee" {N.L.R.B. v. H & H Plastics Mfg. Co., supra, 
89 F.2d 678, 683) and later discharged two leading union advocates, 
^he Company also raised fears of economic reprisal if the Union won the 

Of course, where an employer has tangible evidence of widespread card impro- 
prieties and has communicated this to the Union, the Company's refusal to participate 
in a card check may not carry adverse connotations. Cf. N.L.R.B. v. Logan Packing 
Co., 386 F.2d 562, 565 (C.A. 4) (dictum), relied on by the Company (Br. 24-26). But 
where, as here, the objective evidence indicates no rational basis for doubting the 
Union's maiority, the refusal to participate in a card check is telling evidence of the 
Company's motivation, unaffected by subsequent investigation and arguments of coun- 
sel. See. N.L.R.B. v. Sehon Stevenson & Co., supra, 386 F.2d at 554-556 (concurring 
opinion of Judge Sobeloff); Snow v. N.L.R.B., supra, 308 F.2d at 692. 



48 

election and made reckless and unsubstantiated representations that three 
companies in the area had closed down because of the Union {supra, 
p. 21). On the basis of this pattern of unlawful conduct, the Board, as 
this and other courts have held, could reasonably conclude that the Com- 
pany's refusal to recognize the Union stemmed not from a good faith doubt 
of its majority status but from a total rejection of the principle of collec- 
tive bargaining. N.L.R.B. v. Security Plating Co., supra, 356 F.2d at 727 
(C.A. 9). See also, N.L.R.B. v. Luisi Truck Lines, supra, 384 F.2d at 847; 
N.L.R.B. V. Geigy Co., supra, 211 F.2d at 556; Matthews v. N.L.R.B., 
supra, 354 F.2d at 439; /o>^ Silk Mills v. N.L.R.B., supra, 185 F.2d at 741- 
742; N.L.R.B. v. Quality Markets, Inc., supra, 387 F.2d at 23-26 (C.A. 3); 
N.L.R.B. V. H & H Plastics Mfg. Co., supra, 389 F.2d at 6S3-6S4; N.L.R.B. 
V. Goodyear Tire & Rubber Co., supra, 68 LRRM at 2138; N.L.R.B. v. Big 
Ben Department Stores, Inc., F.2d , 68 LRRM 231 1, 2314 (C.A. 

2); N.L.R.B. v. Atco Surgical Supports, Inc., supra, 68 LRRM at 2201.-^^ 



■^■^The cases cited by the Company at pp. 68-69 of its brief are not to the con- 
trary and are distinguishable on their facts. In N.L.R.B. v. Johnnie's Poultry Co., 344 
F.2d 617 (C.A. 8), and N.L.R.B. v. Morris Novelty Co., 378 F.2d 1000 (C.A. 8) there 
were no unfair labor practices at the time of organizational activity. Compare the 
Eighth Circuit case of N.L.R.B. v. Ralph Printing Co., supra, 379 F.2d 687, 693. In 
Lane Drug Co. v. N.L.R.B., 391 F.2d 812 (C.A. 6) the Union's demand was not clear 
and the employer had had prior experience with an unsuccessful claim by the same 
Union; in Peoples Service Drug Stores, Inc. v. N.L.R.B., 375 F.2d 551 (C.A. 6) the 
only unfair labor practices were coercive statements from minor supervisors not author- 
ized by "top management"; and in N.L.R.B. v. Shelby Mfg. Co., 390 F.2d 595 (C.A. 6), 
the cards used by the Union to present its majority claim were ambiguous on their face 
and could not support a bargaining order. Compare the recent Sbcth Circuit cases of 
N.L.R.B. v. H & H Plastics, supra; N.L.R.B. v. Atco Surgical Supports, Inc., supra, and 
Atlas Engine Works, Inc. v. N.L.R.B., supra, where unfair labor practices similar though 
much less pervasive than here were held propedy to support a finding of an absence of 
good faith doubt. In N.L.R.B. v. Flomatic Corp., 347 F.2d 74 (C.A. 2), there was an 
improper bargaining demand made by the Union and minimal unfair labor practices; 
and Textile Workers Union v. N.L.R.B. (J.P. Stevens), 380 F.2d 292 (C.A. 2), cert, de- 



49 

Contrary to the Company's contention (Br. 76) the Trial Examiner 

md the Board did reject testimony indicating that the Company had a 

?ood faith doubt of majority. As the Examiner stated, "I find that the 

respondent at no time took an introspective view to discover whether it 

lad a good faith doubt or a doubt of any sort concerning the majority 

jtatus of the Union" (R. 30). This determination is, of course, supported 

3y the Company's misconduct, discussed above, which speaks more objec- 

:iveiy than its words. It is also significant that the alleged discussion 

Detween Fink and Howland analyzing employee sentiment on the Union 

ivas held the night before receipt of the Union's demand in circumstances 

tvhich cannot be contradicted by direct evidence. Such testimony is thus 

3f little value in resolving the issue of motivation. See, N.L.R.B. v. Laars 

Engineers, Inc., supra, 332 F.2d at 667. In any event, the testimony does 

lot establish that the Company had a good faith doubt of the Union's 

najority or that its refusal to bargain was based on such doubts. The 

Company admittedly had no knowledge at this time of anything which 

ivould impugn the Union's card majority. See N.L.R.B. v. H & H Plastics 

Mfg. Co., supra, 389 F.2d at 678.y^Fink and Howland had no evidence at 

the time of their discussion that the Union overreached in obtaining cards: 

they did not discuss "who signed a card or didn't sign a card" (Tr. 926). 

lied, 389 U.S. 1005, did not involve Section 8(a)(5) of the Act at all. In N.L.R.B. v. 
River Togs, Inc., 382 F.2d 198 (C.A. 2), the unfair labor practices were minimal— three 
:oercive statements. Compare the Second Circuit's decisions in N.L.R.B. v. Consoli- 
iated Rendering Co., supra; Bryant Chucking Grinder Co., supra, and N.L.R.B. v. Big 
Sen Department Stores, Inc., supra. Judge Friendly, who authored River Togs, recog- 
nizes that the commission of unfair labor practices bears on whether an employer's 
doubts as to the Union's majority provides a "substantial reason for [his] refusal to 
recognize the union rather than simply an excuse later manufactured for a position he 
would have taken in any event. . . ." N.L.R.B. v. United Mineral & Chem. Corp., 391 
F.2d 829, 838 (C.A. 2). 



50 

Moreover, the Company's alleged assessment of union strength was rather 
imprecisely measured by its own illegal questioning of employees; the 
responses were undoubtedly affected by the coercive interrogations. 
Naturally, the Company's unlawful activities may have shaken or diluted 
the Union's majority support. But, in view of its misconduct, the Com- 
pany may not rely on manufactured doubts "based on . . . [the] knowl- 
edge that its illegal tactics had been at least partially successful." N.L.R.B. 
V. Quality Markets, Inc., supra, 387 F.2d at 24. Accord: N.L.R.B. v. 
Geigy Co., supra, 211 F.2d at 556. -^-^ 

C. The Board's bargaining order was a proper remedy 

In the circumstances of this case, the Board reasonably ordered the 
Company to bargain with the Union upon request. As shown above 
(supra, pp. 31-32), a bargaining order is the usual remedy for the violation of 
Section 8(a)(5) even though the Union has lost an election subsequently 
held to be invalid. In the instant case, the Board necessarily set aside the 
election because of the Company's pre-election misconduct, an action not 
questioned by the Company here. The Company's unfair labor practices 
manifestly interfered with the free choice of employees. In these circum- 
stances, it was within the Board's remedial discretion to conclude that the 
Company's interferences with employee rights could best be remedied by 
a bargaining order rather than the holding of a second election. N.L.R.B. 
V. Luisi, supra, 384 F.2d at 847-848. Requiring a second election and the 
posting of a notice would hardly dissipate the effects of the Company's 



Nor does the Company advance its case by contending that its refusal to bar- 
gain was made on the advice of counsel (Br. 79). Company counsel Gould did not 
testify in this case. The only evidence that cards were discussed at this time was that 
Fink told Gould that he heard that one employee signed to be put on a mailing list 
(Tr. 886-887), and that Howland had "information that one or two employees had 
signed cards for other reasons than to be represented" (Tr. 1175). Fink admitted there 



51 

action. On the other hand a bargaining order vindicates the rights of 
employees, a majority of whom had effectively selected the Union as their 
bargaining agent. It also blunts the possibility that an employer may 
profit from his unlawful subversion of the election process. Indeed, where, 
as here, the Union loses its majority status as a result of the employer's 
unfair labor practices, many courts have found a bargaining order appropri- 
ate even where there has been no technical refusal to bargain. See, Wausau 
Steel Corp. v. N.L.R.B., supra, 377 F.2d at 372-374; Piasecki Aircraft Corp. 
v: N.L.R.B., 280 F.2d 575, 591-592 (C.A. 3), cert, denied, 364 U.S. 933; Ed- 
itorial "El Imparcial", Inc. v. N.L.R.B., 278 F.2d 184, 187 (C.A. 1); United 
Steelworkers of America (Northwest Engineering Co.) v. N.L.R.B., 376 
F.2d 770, 772-773 (C.A.D.C), cert, denied, 389 U.S. 932; Local No. 152, 
Teamsters Union v. N.L.R.B., 343 F.2d 307, 309 (C.A.D.C.); NL.R.B. v. 
Delight Bakery, Inc., 353 F.2d 344, 347 (C.A. 6); D.H. Holmes Co. v. 
NL.R.B., 179 F.2d 876, 879-880 (C.A. 5); NL.R.B. v. Caldarera, 209 
F.2d 265, 268-269 (C.A. 8);/.C. Penney Co. v. NL.R.B., 384 F.2d 479, 
486 (C.A. 10). 



was no detailed discussion of individuals (Tr. 889); and the Company did not contact 
the Union about a card check. In these circumstances, the Company's evidence falls 
far short of establishing a good faith doubt of majority in a unit of 114 employees. 
See N.L.R.B. v. H & H Plastics, supra, 389 F.2d at 683. 



52 

CONCLUSION 

For the reasons stated, the petition to review should be denied and 
the Board's order should be enforced in full. 



ARNOLD ORDMAN, 

General Counsel, 

DOMINICK L. MANOLI, 

Associate General Counsel, 

MARCEL MALLET-PREVOST 
Assistant General Counsel, 

JOHN D. BURGOYNE, 
ROBERT A. GIANNASI, 

Attorneys, 

National Labor Relations Board. 



July 1968. 



53 
APPENDIX 



In addition to the statutory appendix in the Company's brief, we con- 
sider the following provisions of the National Labor Relations Act, as 
amended (61 Stat. 136, 73 Stat. 519, 29 U.S.C, Sees 151, et seq.) to be 



relevant: 



RIGHTS OF EMPLOYEES 

Sec. 7. Employees shall have the right to self-organiza- 
tion, to form, join, or assist labor organizations, to bargain 
collectively through representatives of their own choosing, 
and to engage in other concerted activities for the purpose 
of collective bargaining or other mutual aid or protection, 
and shall also have the right to refrain from any or all of 
such activities except to the extent that such right may be 
affected by an agreement requiring membership in a labor 
organization as a condition of employment as authorized in 
section 8(a)(3). 

REPRESENTATIVES AND ELECTIONS 

Sec. 9(a). Representatives designated or selected for the 
purposes of collective bargaining by the majority of the em- 
ployees in a unit appropriate for such purposes, shall be the 
exclusive representatives of all the employees in such unit 
for the purposes of collective bargaining in respect to rates 
of pay, wages, hours of employment, or other conditions of 
employment: Provided, That any individual employee or a 
group of employees shall have the right at any time to pre- 
sent grievances to their employer and to have such grievances 
adjusted, without the intervention of the bargaining repre- 
sentative, as long as the adjustment is not inconsistent with 
the terms of a collective-bargaining contract or agreement 
then in effect: Provided further, That the bargaining rep- 
resentative has been given opportunity to be present at such 
adjustment. 

(b) The Board shall decide in each case whether, in order 
to assure to employees the fullest freedom in exercising the 



54 



rights guaranteed by this Act, the unit appropriate for the 
purposes of collective bargaining shall be the employer unit, 
craft unit, plant unit, or subdivision thereof: Provided, That 
the Board shall not (1) decide that any unit is appropriate 
for such purposes if such unit includes both professional 
employees and employees who are not professional employ- 
ees unless a majority of such professional employees vote 
for inclusion in such unit; or (2) decide that any craft unit 
is inappropriate for such purposes on the ground that a dif- 
ferent unit has been established by a prior Board determi- 
nation, unless a majority of the employees in the proposed 
craft unit vote against separate representation or (3) decide 
that any unit is appropriate for such purposes if it includes, 
together with other employees, any individual employed as 
a guard to enforce against employees and other persons rules 
to protect property of the employer or to protect the safety 
of persons on the employer's premises; but no labor organ- 
ization shall be certified as the representative of employees 
in a bargaining unit of guards if such organization admits 
to membership, or is affiliated directly or indirectly with 
an organization which admits to membership, employees 
other than guards. 

(c) (1) Whenever a petition shall have been filed, in ac- 
cordance with such regulations as may be prescribed by the 
Board— 

(A) by an employee or group of employees or any in- 
dividual or labor organization acting in their behalf alleg- 
ing that a substantial number of employees (i) wish to 
be represented for collective bargaining and that their 
employer declines to recognize their representative as the 
representative defined in section 9(a), or (ii) assert that 
the individual or labor organization, which has been cer- 
tified or is being currently recognized by their employer 
as the bargaining representative, is no longer a representa- 
tive as defined in section 9(a); or 

(B) by an employer, alleging that one or more individ- 
uals or labor organizations have presented to him a claim 
to be recognized as the representative defined in section 
9(a); 

the Board shall investigate such petition and if it has reason- 



55 

able cause to believe that a question of representation affect- 
ing commerce exists shall provide for an appropriate hear- 
ing upon due notice. Such hearing may be conducted by 
an officer or employee of the regional office, who shall not 
make any recommendations with respect thereto. If the 
Board finds upon the record of such hearing that such a 
question of representation exists, it shall direct an election 
by secret ballot and shall certify the results thereof. 

(2) In determining whether or not a question of repre- 
sentation affecting commerce exists, the same regulations 
and rules of decisions shall apply irrespective of the identity 
of the persons fihng the petition or the kind of relief sought 
and in no case shall the Board deny a labor organization a 
place on the ballot by reason of an order with respect to 
such labor organization or its predecessor not issued in con- 
formity with section 10(c). 

(3) No election shall be directed in any bargaining unit 
or any subdivision within which, in the preceding twelve- 
month period, a valid election shall have been held. Em- 
ployees engaged in an economic strike who are not entitled 
to reinstatement shall be eligible to vote under such regula- 
tions as the Board shall find are consistent with the purposes 
and provisions of this Act in any election conducted within 
twelve months after the commencement of the strike. In 
any election where none of the choices on the ballot receives 
a majority, a run-off shall be conducted, the ballot provid- 
ing for a selection between the two choices receiving the 
largest and second largest number of valid votes cast in the 

election. 

* * * 

PREVENTION OF UNFAIR LABOR PRACTICES 

Sec. 10 (e) The Board shall have power to petition any 
court of appeals of the United States, . . . within any circuit 
. . . wherein the unfair labor practice in question occurred 
or wherein such person resides or transacts business, for the 
enforcement of such order and for appropriate temporary 
relief or restraining order, and shall file in the court the rec- 
ord in the proceedings, as provided in section 2112 of title 
28, United States Code. Upon the filing of such petition, 
the court shall cause notice thereof to be served upon such 



56 



person, and thereupon shall have jurisdiction of the proceed- 
ing and of the question determined therein, and shall have 
power to grant such temporary relief or restraining order as 
it deems just and proper, and to make and enter a decree 
enforcing, modifying, and enforcing as so modified, or set- 
ting aside in whole or in part the order of the Board. No 
objection that has not been urged before the Board, its 
member, agent, or agency, shall be considered by the court, 
unless the failure or neglect to urge such objection shall be 
excused because of extraordinary circumstances. The find- 
ings of the Board with respect to question of fact if sup- 
ported by substantial evidence on the record considered as 
a whole shall be conclusive. If either party shall apply to 
the court for leave to adduce additional evidence and shall 
show to the satisfaction of the court that such additional 
evidence is material and that there were reasonable grounds 
for the failure to adduce such evidence in the hearing before 
the Board, its member, agent, or agency, the court may 
order such additional evidence to be taken before the Board, 
its member, agent, or agency, and to be made a part of the 
record .... Upon the filing of the record with it, the juris- 
diction of the court shall be exclusive and its judgment and 
decree shall be final, except that the same shall be subject 
to review by the . . . Supreme Court of the United States 
upon writ of certiorari or certification as provided in section 
1254 of title 28. 



No. 22538 
IN THE 

United States Court of Appeals 

FOR THE NINTH CIRCUIT 



Mechanical Specialties Company, Inc., 

Petitioner, 
vs. 

National Labor Relations Board, 

Respondent. 



On Petition to Set Aside Order of the 
National Labor Relations Board. 



BRIEF OF PETITIONER. 



Carl M. Gould, 

Edwin H. Franzen, 

Stanley E. Tobin, F I I P D 

Kyle D. Brown, r I L- C- L-^ 

Hill, Farrer & Burrill, ^ 

34th Floor, MAY 1-6 1968 

Attorneys for Petitioner. 



Parker & Son, Inc., Law Printers, Los Angeles. Phone MA. 6-9171. 



TOPICAL INDEX 

Page 
Jurisdictional Statement 1 

I. 
Statement of the Case 1 

II. 

Specification of Errors Relied Upon 3 

III. 
Summary of Argument 4 

IV. 
Argument 5 

Part 1. 

The Union's Alleged Majority and the Peti- 
tioner's Good Faith Doubt: the Asserted 8- 
(a)(5) Violation 5 

Preliminary Statement 5 

A. The Union's Alleged Majority: Fraud 
Run Rampant 8 

B. The Facts Relating to the Union's 
Gross Misrepresentations Z7 

C. The Record Demonstrates That Peti- 
tioner Had a Good-Faith Doubt That 
the Union Represented a True Majori- 
ty of Its Employees 66 

Part 2. 

There Is No Substantial Evidentiary Support 
for Findings That Petitioner Committed 
Any Unfair Labor Practices 82 



11. 

Page 

A. Purported Section 8(a)(1) Violations .. 82 

(1) Alleged Questioning in "Context of 
Threats" 82 

(2) The Wage Increase 88 

B. Alleged 8(a)(2) Violation— The Griev- 
ance Committee 92 

C. Alleged Unlawful Discharges — Section 
8(a)(3) 93 



Conclusion 99 



INDEX TO APPENDICES 
Appendix A. UAW Fact Finder 1 

Appendix B. Transcript References Depicting 
General Employer-Employee Communication Prac- 
tices as They Pertain to the Good Faith Ques- 
tion 3 

Appendix C. Evidence Which Employer Consid- 
ered in Formulating Its Decisions on Each and 
Every Employee's Union Sentiment — The Major 
Basis for Petitioner's Good Faith Doubt 5 

Appendix D. Pertinent Statutory Provisions 61 

Appendix E. Pertinent General Counsel's Ex- 
hibits - 64 

Employers Mechanical Specialities 68 

Charging Party 69 



111. 

TABLE OF AUTHORITIES CITED 

Cases Page 

Aaron Bros, of California, 158 NLRB 1077 67 

Bauer Welding and Metal Fabricators, Inc. v. 

NLRB, 358 F. 2d 766 6, 31, 35, 51, 59 

Bernel Foam, 146 NLRB 1277 5, 6, 24, 60, 66, 79 

Bourne Co. v. NLRB, 332 F. 2d 47 83 

Conso Fastener Corp., 120 NLRB 532 11 

Crawford Manufacturing Co., Inc. v. NLRB, 386 

F. 2d 367 6, 26, 28, 29, 45, 51, 78, 99 

Cumberland Shoe Corp., 144 NLRB 1268, enfd., 
NLRB V. Cumberland Shoe Corp., 351 F. 2d 917 
30, 31, 32 

Dayco Corp. v. NLRB, 382 F. 2d 577 6, 31 

Don the Beachcomber v. NLRB, 390 F. 2d 344 .. 
7, ^7, 83 

Engineers & Fabricators, Inc. v. NLRB, 376 F. 2d 

482 6, 18, 20 

Englewood Lumber Company, 130 NLRB 394 18 

Filler Products, Inc. v. NLRB, 376 F. 2d 369 6 

Hammond & Irving, Inc., 154 NLRB 84 67 

Harvard Coated Products Co., 156 NLRB 4 67 

Hendrix Mfg. Co. v. NLRB, 321 F. 2d 100 82 

Hercules Packing Corp., 163 NLRB 35 67 

Hope V. Arrowhead & Puritas Waters, Inc., 74 Cal. 

App. 2d 222, 344 P. 2d 428 14 

Indiana Rayon Corp., 151 NLRB 130 11, 12 

International Ladies Garment Workers v. NLRB, 

366 U.S. 731 80 



IV. 

Page 

Lane Drug Co. v. NLRB, F. 2d (6th Cir. 

1968) 7, 69, 78, 83 

Lawson Milk Co. v. NLRB, 317 F. 2d 756 99 

Maphis Chapman Corp. v. NLRB, 368 F. 2d 298 .. 64 

McQuay-Norris Mfg. Co., 157 NLRB 131 67 

Monroe Manufacturing Co., 162 NLRB 8 67 

Nahas Department Store No. 3, 58 LRRM 1687 .. 80 

National Food Stores Inc., 169 NLRB No. 12 86 

NLRB V. Arkansas Grain Corp., F. 2d 

(8th Cir. 1968) 7, 35, 36 

NLRB V. Dan Howard Manufacturing Co., 390 F. 
2d 304 6, 34 

NLRB V. Flomatic Corporation, 347 F. 2d 74 ..7, 69 

NLRB V. Freeport Marble & Tile Co., Inc., 367 F. 
2d 371 6 

NLRB V. Houston Chronicle Pub. Co., 211 F. 2d 
848 99 

NLRB V. Johnnie's Poultry Co., 344 F. 2d 617 .... 
7, 67, 69 

NLRB V. Lake Butler, F. 2d (5th Cir. 

1968) 6, 30 

NLRB V. Lifetime Door Company, F. 2d 

(4th Cir., 1968) 28 

NLRB V. Midwestern Manufacturing Co., Inc., 388 
F. 2d 251 6, 11, 12, 36 

NLRB V. Morris Novelty Co., 378 F. 2d 1000 

7, 69, 84 

NLRB V. S. E. Nichols Company, 380 F. 2d 438 .. 
6, 20, 21, 22, 34 



V. 

Page 

NLRB V. River Togs, Inc., 382 F. 2d 198 

6, 7, 11, 12, 68, 78 

NLRB V. Shelby Manufacturing Company, 390 F. 
2d 595 6, 7, 34, 69 

NLRB V. S. S. Logan Packing Company, 386 F. 2d 
562 6, 24 

NLRB V. Swan Super Cleaners, Inc., 384 F. 2d 609 
6, 32, 33, 99 

NLRB V. TRW Semiconductors, Inc., 385 F. 2d 753 
71, 87 

NLRB V. The Golub Corporation, 388 F. 2d 921 .. 
6, 22, 88 

NLRB V. Universal Camera Corp., 340 U.S. 474 .... 98 

NLRB V. Wagner Iron Works, 220 F. 2d 126 99 

People V. Tallman. 27 Cal. App. 2d 209, 163 P. 2d 
857 14 

Peoples Service Drug Stores, Inc. v. NLRB, 375 
F. 2d 551 7, 69 

Southwire Co. v. NLRB, 383 F. 2d 235 86 

Strydel, Inc., 156 NLRB No. 114 67 

Sunbeam Corp., 99 NLRB 546 17 

Supernant Mfg. Co. v. NLRB, 341 F. 2d 756 82 

Textile Workers Union v. NLRB, 380 F. 2d 292 .. 

7, 69 

Wausau Steel Corp. v. NLRB, 377 F. 2d 369 7 

Werthan Bag Corp., 167 NLRB No. 3 91 

Miscellaneous 

Gordon, Union Authorization Cards and the Duty to 
Bargain, Daily Labor Report, p. 33 BNA, Feb- 
ruary 15, 1968 66 



VI. 

Page 

Starlight Mig. Co., et al, BXA, 64 Daily Labor 
Report, April 1. 1968 14 

Statutes 
Evidence Code, Sec. 721 14 

National Labor Relations Act, Sec. 8(a)(1) 

2, 3, 4, 60, 69, 71, 80, 82. 84, 88, 90, 93 

National Labor Relations Act. Sec. 8(a)(1) (2) (3) 
2 

National Labor Relations Act, Sec. 8(a)(l)(2)(5) 
2 

National Labor Relations Act, Sec. 8(a)(2) ., 

2, 3, 4, 60, 71, 80, 92, 93 

National Labor Relations Act. Sec. 8(a)(3) 

2, 3, 4. 93. 99 

National Labor Relations Act, Sec. 8(a)(5) 

2, 3, 5, 6, 8, 68, 69, 80. 93 

National Labor Relations Act, Sec. 8(c) 83, 86, 88 

National Labor Relations Act, Sec. 10(f) 1 

61 Statutes at Large, p. 136 1 

United States Code, Title 27, Sec. 141 1 

Textbooks 

65 Michigan Law Review (1967), p. 851 5 

33 University of Chicago Law Review (1967), p. 

387 '. 5 

7 Wigmore on Evidence (3 Ed.), p. 213 14 

75 Yale Law Journal (1966), p. 804 5, 17 

75 Yale Law Journal (1966). pp. 818-819 17 



No. 22538 
IN THE 

United States Court of Appeals 

FOR THE NINTH CIRCUIT 



Mechanical Specialties Company, Inc., 

Petitioner, 
vs. 

National Labor Relations Board, 

Respondent. 



On Petition to Set Aside Order of the 
National Labor Relations Board. 



BRIEF OF PETITIONER. 



Jurisdictional Statement. 

This case is before this Court by way of a petition 
praying that a Decision and Order of the National 
Labor Relations Board (reported at 166 NLRB No. 
31) be reviewed and set aside. The Board has filed a 
cross-petition for enforcement of its Order. Petitioner 
is engaged in business in this judicial circuit, in the 
State of California, and the unfair labor practices alleged 
in the complaint upon which the Decision and Order of 
the Board was entered allegedly occurred in California. 
Petitioner is aggrieved by such final Order of the Re- 
spondent and, therefore, this Court has jurisdiction 
under § 10(f) of the National Labor Relations Act, as 
amended [61 Stat. 136 et seq. (1947), 27 U.S.C. §141 
et seq. (1958)] (The pertinent statutory provisions are 
reprinted, infra, at Appendix D.) The Respondent, in 
its answer and cross petition, has admitted Petitioner's 
jurisdictional allegations. 

I. 
STATEMENT OF THE CASE. 

Mechanical Specialties Company, the Petitioner, lo- 
cated in the Metropolitan Los Angeles area, is en- 
gaged in business in the manufacture of tools, gauges, 
special machines, missile components and nuclear com- 
ponents for its customers. It has been in business for 
the past 30 years and employs about one hundred and 
fifty employees. On March 16, 1965, Petitioner received 
a demand letter from the United Auto Workers Union 
stating that it represented a majority of Petitioner's 
employees and requesting that collective bargaining 
negotiations be commenced. By letter of March 19, 
1965, Petitioner responded stating, among other things, 
that it doubted in good faith the Union's claim to 
majority status and rejected the demand. 

On March 22, 1965, the union filed a representation 
petition with Region 31 of the NLRB seeking a union 



election in the plant [G.C. Ex. 1(a); R. T. 5].* After 
a representation hearing was held to determine ques- 
tions of unit scope and employee eligibility, Respondent 
directed an election [G.C Ex. l(b)(c); R. T. 5]. The 
results of that election, held June 11, 1965, show a 
decisive rejection of the union — 59 to 40 [G.C. Ex. 
1(d)]. 

Thereafter the union filed objections to the election 
and first amended unfair labor practice charges which 
alleged violations of Section 8(a)(1) (2) (3) and (5) 
of the Act [G.C. Ex. 1(f), (h)]. 

The Respondent's Regional Director then issued a 
complaint and consolidated for hearing the objections 
and unfair labor practice charges [G.C. Ex. 1 (j), 
(1)]. The hearing took place from April 25 to 
May 26, 1966 before an NLRB Trial Examiner. On 
February 23, 1967, the Trial Examiner's Decision is- 
sued, finding that Petitioner had violated §8(a)(l) 
by engaging in coercive pre-election conduct, §8 (a) (2) 
for having formed a grievance committee, §8(a)(3) 
for having terminated employees Klein and Cantrell, and 
§8(a)(5) for having refused to bargain with the union 
in March 1965 upon its demand [C. T. 23-42]. Peti- 
tioner filed exceptions to that Decision with Respond- 
ent [C. T. 46-65]. On June 28. 1967, Respondent's 
Decision and Order issued upholding its Trial Exam- 
iner in all material respects [C. T. 66-69]. The em- 
ployer's Petition for Review by this Court followed 
on January 11, 1968, asking that the Respondent's 
Order be set aside in its entirety [C. T. 70-81]. 



*References to the stenographic transcript of the consolidated 
hearing are preceded by the designation "R. T." and citation is 
made to the appropriate transcript page number. References to 
the documents reproduced in "Transcript of Record, Vol. I" are 
preceded by the designation "C. T." and citation is made to the 
appropriate page number. References to all undesignated ex- 
hibits are made by citation to the appropriate exhibit number. 



— 3— 

II. 
SPECIFICATION OF ERRORS RELIED UPON. 

The Respondent erred in the following respects: 

1. In concluding and holding that the Union, on 
March 12, 1965 and at all times material herein, had 
been freely designated as bargaining representative by a 
majority of Petitioner's employees in an appropriate 
unit. 

2. In concluding and holding that Petitioner did not 
have a good faith doubt that the Union represented a 
majority of its employees at the time of the Union's 
demand for recognition. 

3. In concluding and holding that Petitioner had 
unlawfully refused to bargain with the Union within 
the meaning of §8 (a) (5) of the Act. 

4. In concluding and holding that Petitioner violated 
§8(a)(l) by questioning employees in a context of 
threatened plant closure and by granting a wage in- 
crease. 

5. In concluding and holding that Petitioner vio- 
lated §8 (a) (2) by creating and using a grievance com- 
mittee. 

6. In concluding and holding that employees Can- 
trell and Klein were discharged by Petitioner in order 
to discourage activity on behalf of the Union in vio- 
lation of §8(a) (3) of the Act. 



III. 

SUMMARY OF ARGUMENT. 

In this brief, Petitioner will show : 

A. The Union at no time was the freely selected 
collective bargaining representative of a majority of 
Petitioner's employees. On the contrary, the preponder- 
ance of evidence shows that Petitioner's employees were 
duped and misled into signing union authorization 
cards in the belief, induced by union representatives, 
that the cards would merely lead to an election. Re- 
spondent erroneously and prejudicially ignored or dis- 
counted all of this evidence. 

B. That even, arguendo, if it could be held that a 
majority of Petitioner's employees had freely and in- 
tentionally designated the Union as its collective bar- 
gaining agent, nonetheless, at the time the Union made 
its demand upon Petitioner, the Petitioner had a good 
faith doubt as to the Union's majority and therefore 
properly and by law rejected the Union's demand; 
that said good faith doubt was proven conclusively 
in the record but that Respondent erroneously and prej- 
udicially ignored or discarded all of this evidence; and 
that even if it be found that Petitioner committed un- 
fair labor practices, said activity did not and does not 
detract in any way from the proven good faith doubt as 
to the Union's majority held by Petitioner. 

C. That the 8(a)(1), 8(a)(2) and 8(a)(3) find- 
ings by Respondent are unsupported in the record, er- 
roneous and prejudicial to Petitioner and based not 
upon facts but upon its Trial Examiner's own unique 
philosophy of how Petitioner should run its plant and 
how the Act should be interpreted; and, at any rate, 
assuming the commission of any unfair labor practice, 
such activity does not justify or permit the remedy 
urged by Respondent. 



— 5— 

IV. 
ARGUMENT. 

PART 1. 
THE UNION'S ALLEGED MAJORITY AND THE 
PETITIONER'S GOOD FAITH DOUBT: THE AS- 
SERTED 8(a)(5) VIOLATION. 

Preliminary Statement. 

The principal issues involved in this case center 
around the application of the doctrine advanced in the 
Bernel Foam case, 146 NLRB 1277 (1964), which 
would require Petitioner to recognize and bargain with 
the Union, notwithstanding the Union was decisively 
rejected by the great majority of Petitioner's em- 
ployees in an NLRB election. The Respondent Board 
affirmed its Trial Examiner's strictest possible ap- 
plication of that doctrine against the overwhelming 
weight of evidence and, Petitioner submits, contrary 
to the emphatically expressed desire, af all times, of those 
most affected — the employees. The Trial Examiner's 
and Respondent's instant decisions have been routinely 
advanced by them notwithstanding the near universal 
position of the courts that Bernel Foam (as even its pro- 
ponents would admit) is a harsh "remedy" and should 
not be applied pro forma but should be resorted to only 
in the most telling situations.^ 



^Petitioner herein does not attack the Bernel Foam doctrine 
but rather its application in the premises. The doctrine, but 
more particularly its application by the Board in numerous cases 
has been strongly attacked by scholarly reviews. See an excel- 
lent Note entitled "Union Authorization Cards" in 75 Yale Law 
Journal 804 (1966). See also Lesnick "Establishment of Bar- 
gaining Rights without an NLRB Election", 65 Mich. L. Rev. 
851 (1967) ; "Refusal-To-Recognize Charges under Section 8- 
(a)(5) of the NLRA: Card Checks and Employee Free Choice" 
33 U. Chic. L. Rev. 387 (1967). While some courts and writers 
have supported the theory of Bernel Foam, the Board's applica- 
tion of that doctrine in numerous instances has scarcely been de- 
fended and has been under attack by both authorities in the field 
and the Circuit Courts, as will be indicated injra. 



— 6— 

Indeed, since this case arose and was heard, most 
federal Circuit Courts have been confronted with situa- 
tions wherein the Board urged that its Bernel Foam 
8(a)(5) holding be upheld. And in all cases involving 
similar facts as those existing in the instant litigation, 
at least eight Circuits have clearly but emphatically 
rejected the Draconian positions urged by Respondent. 

In regard to the question as to whether, in the first 
instance, the Union properly obtained a majority of 
authorization cards, so as to permit even consideration 
of a Bernel Foam remedy, at least seven Circuit Courts 
have in numerous cases denounced the very same posi- 
tion that the Board advances in this case.^ 

As to the second issue, whether Petitioner held a 
good faith doubt as to the Union's majority, assuming, 
arguendo, the existence of a majority, at least five 



^Second Circuit : NLRB v. S. E. Nichols Company, 380 F. 2d 
438 (1967); NLRB v. River Togs, Inc., 382 F. 2d 198 (1967); 
NLRB V. Golub Corporation, 388 F. 2d 921 (1967). 

Fourth Circuit: Filler Products, Inc. v. NLRB, 376 F. 2d 
369 (1967) ; Crawford Manufacturing Co., Inc. v. NLRB, 386 

F. 2d 367 (1967), cert, den., U.S ; NLRB v. S. S. 

Logan Packing Company, 386 F. 2d 562 (1967). 

Fifth Circuit : Engineers & Fabricators, Inc. v. NLRB, 376 

F. 2d 482 (1967); NLRB v. Lake Butler, F. 2d 

(1968). 

Sixth Circuit: Dayco Corporation v. NLRB, 382 F. 2d 577 
(1967); NLRB v. Szvan Super Cleaners, Inc., 384 F. 2d 609 
(1967): NLRB v. Shelby Manufacturing Company, 390 F. 2d 
595 (1968). 

Seventh Circuit : NLRB v. Dan Howard Manufacturing Co., 
390 F. 2d 304 (1968). 

Eighth Circuit : Bauer Welding and Metal Fabricators, Inc. 
V. NLRB, 358 F. 2d 766 (1966). 

Tenth Circuit : NLRB v. Midwestern Manufacturing Co., 
Inc., 388 F. 2d 251 (1968). 

And see also NLRB v. Freeport Marble & Tile Co., Inc., 367 
F. 2d 371 (1st Cir., 1966). 



— 7— 

Circuits, including this Court, in a number of cases 
have spurned the unrealistic position of Respondent.^ 

The foregoing overwhelming case authority should be 
decisive of the instant action; indeed, the absence of a 
true majority in support of the Union and the patent 
existence of a good faith doubt on the part of Peti- 
tioner are even more emphatic in light of the record 
in the instant case than was the situation in any of the 
foregoing cases wherein Respondent's positions were 
rejected. 

The most salient point in this case, and one which 
the Trial Examiner and Board recognized only in the- 
ory, is that it is employees' rights we are expounding. 
Whatever the alleged "sins" of Petitioner may be, un- 
less they clearly had the effect of dissipating an es- 
tablished majority for the Union, to apply the Bernel 
Foam "remedy" would make the 1947 legislation a 
mockery of individual rights. Better to fine or punish 
the sinner (if he be such) than to "remedy" the situa- 
tion by "punishing" the employees. And if Respond- 
ent does not have the authority to fine or punish Pe- 



^Second Circuit: NLRB v. Flonmtic Corporation, 347 F. 2d 
74 (1965); NLRB v. River Togs, Inc., 382 F. 2d 198 (1967); 
Textile Workers Union v. NLRB, 380 F. 2d 292 (1967). 

Sixth Circuit : Peoples Service Drug Stores, Inc. v. NLRB, 
375 F. 2d 551 (1967); NLRB v. Shelby Manufacturing Com- 
pany, 390 F. 2d 595 (1968) ; Lane Drug Co. v. NLRB, F. 

2d (1968). 

Seventh Circuit : Wausau Steel Corp. v. NLRB, 2>77 F. 2d 369 
(1967). 

Eighth Circuit: NLRB v. Johnnie's Poultry Co., 344 F. 2d 617 
(1965) ; NLRB v. Morris Novelty Co.. 378 F. 2d 1000 (1967); 
NLRB V. Arkansas Grain Corp., F. 2d (1968). 

Ninth Circuit: Don The Beachcomber v. NLRB. 390 F. 2d 
344 (1968). 



— 8— 

titioner — assuming that such is even proper — then it 
should go to Congress to seek such authority; it should 
not macerate the rights of employees to teach employers. 

The final critical test here is did the Union at the 
crucial period of time in question truly represent the 
majority of the employees of Petitioner. And, assum- 
ing, arguendo, that this could possibly be answered in 
the affirmative, can it be said that the General Coun- 
sel has borne the burden of proof of showing that the 
Employer did not entertain a good faith doubt as to 
the Union's representative authority? If, as we con- 
tend and as we trust the record supports, either the 
Union did not represent a majority of the employees 
or the Petitioner did have a good faith doubt as to the 
existence of a union majority in an appropriate unit, 
then an 8(a)(5) finding cannot be supported either 
in law, logic or on the record. 

A. The Union's Alleged Majority: 
Fraud Run Rampant. 

Clearly, for Respondent to travel successfully the 
long road leading to a Bernel Foam "remedy," it must 
first begin by proving that the Union, at the time it 
made its demand upon Petitioner, had been selected by a 
majority of Petitioner's eligible employees within an 
appropriate unit for the purpose of representing those 
employees in collective bargaining. The Board's Gen- 
eral Counsel has failed to meet the burden of proof 
incumbent upon him in the premises. The evidence 
shows that there has never been, at any time pertinent 
to these proceedings, a majority of the employees of 



— 9— 

Petitioner who have freely, and without misrepresen- 
tation, designated the Union as its collective bargain- 
ing agent. 

The General Counsel introduced its Exhibit No. 101, 
which the parties stipulated to as being "the list of 
employees to be considered as the appropriate unit at 
the time of the demand which was March 12 continu- 
ing through March 16 (1965)," excluding certain em- 
ployees and leaving the status of three and later only 
one employee in doubt [R. T. 717-720]. An examina- 
tion of that exhibit shows there to be 114 employees 
within the unit at the time of the demand. Of this 
number, only the status of one individual at the end of 
the hearing was in issue.* Thus, it was necessary for 
the General Counsel to show that 57 or 58 employees 
validly and freely designated the Union as their collec- 
tive bargaining agent. 

In an effort to meet his burden of proof, the Gen- 
eral Counsel introduced Union authorization cards of 
various employees. The authenticity of approximately 
half of these cards was evidenced not by the indi- 
viduals who purportedly signed these cards but by hand- 
writing expert testimony. In toto, 68 authorization 
cards, which the Union allegedly possessed as of the 
time Petitioner received its demand, were introduced 
in evidence and the authenticity (as distinguished from 
the validity) of most, but not all, of these cards was 
supported either by testimony of the General Counsel's 



^The record is unclear as to whether Zadnik during this time 
possessed the requisite indices of a supervisor. 



—10— 

expert or evidence of other witnesses, including some 
of the purported signators of these cards. ^ 

The authenticity of at least three of the cards clear- 
ly lacked in the record the verification necessary to 
allow their acceptance as evidence supporting the 
Union's alleged majority and, in these cases, the cards 
may not be used for that purpose. The General Coun- 
sel failed to bear his burden of proof in regard to 



^The following are the applicable cards admitted into evid 




G.C. 




G.C. 


1. 


#25 Cantrell 


35. 


#67 Howard 


2. 


#28 I. Klien 


2>6 


#68 Hughes 


3. 


#29 Rawl 


17. 


#69 Johnson 


4. 


#30 Ahlstrom 


38 


#70 Kastendick 


5. 


#31 Knowles 


39 


#71 T. Klein 


6. 


#Z2> Burke 


40. 


#72 Kofink 


7. 


#34 Proudfoot 


41. 


#73 Kuhmann 


8. 


#40 Ampthor 


42. 


#74 Lamb 


9. 


#41 Anothaiwongs 


43. 


#75 Lawrence 


10. 


#42 Bertram 


44. 


#76 Meier 


11. 


#43 Booze 


45. 


■i^77 Morrow 


12. 


#44 Cheetham 


46. 


#78 G. Neumann 


13. 


#45 Christenson 


47. 


#79 K. Neumann 


14. 


#46 Christopher 


48. 


#80 O'Kane 


15. 


#47 Cisneros 


49. 


#81 Osdale 


16. 


#48 Congrove 


50. 


#82 Patterson 


17. 


#49 Conner 


51. 


#83 Polony 


18. 


#50 A. Crandall 


52. 


#84 Rhedin 


19. 


#51 D. Crandall 


53. 


#85 Schlapp 


20. 


#52 Cuda 


54. 


#86 Scoggins 


21. 


#53 Dellomes 


55. 


#87 Seymour 


22. 


#54 Dodd 


56. 


#88 Smith 


23. 


#55 Doebler 


57. 


#89 Tieman 


24. 


#56 Dufek 


58. 


#90 Thiekotter 


25. 


#57 Estrada 


59. 


#91 Virgil 


26. 


#58 Garger 


60. 


#92 Voegeli 


27. 


#59 Garrett 


61 


#93 Vogel 


28. 


#60 Gedminas 


62. 


#94 Welch 


29. 


#61 Gumm 


63 


#95 Rbt. Weymar 


30. 


#62 Haeler 


64. 


#96 Rolf Weymar 


31. 


#63 Harrison 


65. 


#97 T. B. Williams 


32. 


#64 Hinsch 


66. 


#98 Wilson 


33. 


#65 Hoef 


67. 


#99 Wright 


34. 


#66 Homnan 


68 


#100 Zirbel 



—11— 

these three cards and the Trial Examiner and Board 
completely ignored any and all evidence pertaining to 
the authenticity of any of these three particular cards; 
indeed they did not even allude to them though they 
were clearly and continually raised.^ 



®(1) G.C. Ex. #41, purportedly signed and dated by Niyom 
Anothaiwongs, a citizen of Thailand who was, at the time of the 
hearing, in Thailand [R. T. 1739-1740]. The General Counsel's 
handwriting expert testified that he had no opinion as to whether 
Anothaiwongs did, in fact, both sign and date G.C. #41 [R. T. 
248, lines 4-5]. The General Counsel attempted to have this nec- 
essary information supplied by Anothaiwongs' fellow country- 
man and employee, Manit Homnan (Narathip). Homnan, him- 
self, could scarcely read English and was extremely limited in his 
ability to speak the language. He, himself, did not make out 
his own card but Anothaiwongs purportedly did. Homnan tes- 
tified on direct examination that he did not know whether Ano- 
thaiwongs signed his own card [R. T. 491, lines 17-19; 492, Hues 
3-4] and at one point stated that Anothaiwongs did not show it 
to him [R. T. 493, Hne 25, to 494, line 4]. Under these cir- 
cumstances, there is no question that the card may not be in- 
cluded for the purpose of determining a majority. See Indiana 
Ravon Corp., 151 NLRB 130, 1294 (1965); Conso Fastener 
Corp., 120 NLRB 532 (1958). See also NLRB v. River Togs, 
Inc., 382 F. 2d 198 (1967); NLRB v. Midzvestern Manujac- 
turing Co.. Inc., 388 F. 2d 251 (10 Cir., 1968). 

(2) G.C. Ex. #55 was purportedly signed and dated by Den- 
nis Doebler, who at the time of the hearing, was in the Army 
[R. T. 1739-1740]. The expert called by the General Counsel 
was not able to give an opinion as to whether G.C. #55 was 
both signed and dated by Doebler [R. T. 205, line 6; 250, line 
4]. Subsequently, the General Counsel tried to establish the 
validity of this card through the testimony of Irving Klein. 
Klein testified that he gave Doebler a card but he did not know 
the exact date, adding, "practically the first two weeks of March." 
[R. T. 305, lines 1-8]. Klein did not testify as to when Doebler 
gave him the card back and he added that he paid no attention 
to the date on the card nor did he see him sign it [R. T. 307, line 
6, to 308. line 8]. Also, there is no evidence whatsoever when 
Klein turned this card into the Union. 

Since the record does not show when Doebler's card was signed, 
nor when Doebler dated it, nor if he dated it, nor whether it 
was handed to Doebler by Klein before or after the Union made 
its demand, nor when he returned it to Klein, nor when Klein 
turned it into the Union, it is abundantly clear that this card, too, 
may not be considered valid designation of the Union by Doebler 
(This footnote is continued on the next page) 



—12— 

Moreover, the Trial Examiner unduly and prejudi- 
cially precluded Petitioner from properly examining 
the handwriting expert in order to impeach his au- 
thentication of authorization cards. The General Coun- 
sel called an expert. John J. Harris, who testified to 
the authenticity of signatures on nimierous cards by 
comparing them with other doctiments which employees 
had signed, including \\'-4 forms, aU admittedly gen- 
uine. 

On cross-examination, counsel for Petitioner tried 
to have Harris compare certain authorization cards 
with other docimients purportedly signed by employees 
about whose cards he had not testified [R. T. 255-256]. 
Some of these employees were later going to testify 
directly as to whether their card signatures were au- 
thentic. Counsel for Petitioner began b}* showing Har- 
ris an employee's W-4 withholding form for one Andy 
Ahlstrom. together with a group insurance applica- 
tion form and two checks purportedly signed by him. 
At this point, the general Counsel objected to coun- 
sel's questioning as being outside the scope of direct 
examination. The Trial Examiner erroneously sustained 
the objection [See R. T. 256-258]. 

at the time in question. See Indiana Rayon Corp., Conso Fas- 
icmr Corp.^ XLRB z: Rh'er Togs, Inc. and XLRB v. Mid- 
ii^esiem ilanujacturing Co., Inc., supra. 

(3) G.C. Ex. #76 was puqx)rtedly signed and dated by Anton 
Meier, who at the time of the heanng was in Oregon [R. T. 
1739-1740]. The General Cotmsel's exjjert was unable to testifj- 
whether the person who signed G.C. #76 was the same person 
who filled in the date nor could he identif)' the person who did 
so [R. T. 225. Une 18. to 226. line 13]. The expert caUed by 
Petitioner, however, stated emphatically that the date on G.C. 
=r76 %'i-as not filled in bv Meier nor bv the person who signed 
that card [R. T. 1272. lines 6-25 : 1273.' line 22, to 1274, line 1 : 
1278. line 22. to 1279. line 5]. Ob^-iously. the card may not be 
utilized for the pmpose it was offered. See Indiana Rayon Corp.. 
Conso Fastener Corp., NLRB r. River Togs, Inc., and NLRB 
V. Midwestern Manufacturing Co., Inc., supra. 



—13— 

The Trial Examiner misconceived the proper scope 
of cross-examination of an expert witness when he 
limited that examination solely to signatures which had 
been verified on direct. It is a well-established rule of 
evidence that the cross-examination of an expert wit- 
ness is not limited to the scope of his testimony on di- 
rect but that, in addition, an expert may be fully cross- 
examined as to the matter upon which his opinion is 
based and the reasons for his opinion. This, of course, 
includes showing- an expert specimens on cross-exam- 
ination of what has not been testified to on direct, in 
order to impeach his prior testimony. Obviously, if 
counsel had been allowed to continue this line of ex- 
amination, and the expert had after comparison testi- 
fied to the genuineness or invalidity of a signature on 
any document of one who later testified on the stand 
to the contrary, a wholly different light would have 
been thrown on all of the cards which the expert had 
previously verified. 

In his treatise on evidence, Wigmore soundly con- 
demns any prohibition on the use of this technique. 
Thus, he states : 

"That the latter [use of documents whose gen- 
uineness is not already admitted to impeach an 
expert] is the better course seems clear. The rea- 
son is that the deprivation of this weapon for the 
cross-examiner is a loss so serious as to outweigh 
the inconveniences of its sanction. When, for ex- 
ample, the witness has sworn positively that the 
disputed signature is genuine, and then, on exam- 
ining a new signature submitted to him, he de- 
clares with equal positiveness that it is a forgery 
and perhaps points out the (to him) unmistak- 
able marks of difference, the testimony of a single 
unimpeachable witness that he saw the supposed 



—14— 

forgery written by the person bearing that name 
disposes at once of the trustworthiness of the first 
witness and the certainty of his conclusion. In 
many other similar ways a single test of this sort 
will serve to demolish the most solid fabric of 
handwriting testimony. There should be no limita- 
tions whatever on the power of employing these 
tests." (W'igmore on Evidence, 3 Ed. Vol. VII, 
p. 213)' 
It is therefore, improper to sustain an objection to 
this line of questioning merely because it extends be- 
yond the scope of direct examination. 

Resolution of the question of majority status solely 
on the basis of cards is a questionable procedure at 
best. The situation becomes even more aggravated when 
the General Counsel attempts to prove the authenticity 
of cards, not by the direct, in-person testimony of those 
who purportedly signed them, but rather through the 
testimony of a handwriting expert. Certainly in this 
situation, counsel for Petitioner should be afforded the 
widest latitude in his attempts to impeach that expert 
by inducing him to affirm the genuineness of a false 
specimen or to deny the genuineness of an authentic 
specimen. This was precisely what the Trial Examiner's 
ruling precluded Petitioner from doing. 

At any rate — and aside from the foregoing argu- 
ment — there can be no question that the authenticity of 



"Under the Act, Trial Examiners are bound to follow rules of 
evidence applicable in U. S. District Courts which, in turn, fol- 
low state rules of evidence. Starlight Mjg. Co., et al., BXA, 64 
Daily Labor Report, April 1, 1968. The new California 
Evidence Code. Section 721, is in accord with Wigmore. 

The reason for the more liberal rule of cross-examination is 
made clear in Hope v. Arrou-'head & Puritas Waters, Inc., 74 
Cal. App. 2d 222. 344 P. 2d 428 (1959). See also People v. 
Talhmn, 27 Cal. App. 2d 209. 163 P. 2d 857 (1966). 



—15— 

G.C. Exs. 41, 55 and 76 has not been adequately sup- 
ported by the General Counsel and, accordingly, at the 
very least, they may not be included for the purpose of 
determining- the Union's alleged majority. Thus, at the 
most, there is in evidence the cards of only 65 employees 
that have been shown to be authentic and that may 
possibly be utilized for the purpose of attempting to es- 
tablish that the Union had been designated by a ma- 
jority of the employees at the time in question. 

The next question — and one of critical and major 
significance — is the determination of how many of 
these 65 cards truly represented the voluntary designa- 
tion of the Union as the collective bargaining agent 
of the signators and, conversely, how many of these 
cards must be rejected and declared invalid for this 
purpose because of false representations, important 
misleading statements and other expressions of de- 
ceit that caused various signators to sign the cards. 

The Trial Examiner and Respondent completely ig- 
nored the voluminous evidence concerning these mat- 
ters, including the uncontradicted testimony of not only 
Petitioner's witnesses but witnesses for the General 
Counsel clearly underscoring and supporting Petition- 
er's position. The Trial Examiner simply disallowed 
(more as a matter of personal conviction than on credi- 
bility) all the employee's testimony because, as he 
put it, the employees were "intelligent." Admittedly 
the employees are intelligent individuals and fine crafts- 
men. But most of them were totally unsophisticated 
concerning the field of labor-management relations. A 
large amount, if not the majority, are recent immi- 
grants to this country, many of them can scarcely read 
English, a great proportion of them usually talk in one 
of many foreign languages, and virtually none of them 
had reason to disbelieve the Union when it made its 



—16— 

misrepresentations. To state, as the Trial Examiner 
did, that "One who preferred not to have a Union 
would probably prefer also not to have an election 
and would not sign a card" [C. T. 29. Hues 11-40], is 
not only totally unsophisticated on the part of a layman, 
to say nothing of a Trial Examiner and Respondent, 
but defies the record in this case. Such a position exalts 
the authorization card, as such, to a position which is 
contrary to law, logic, reason and reality. If the conse- 
quences of such a position were not so tragic, it could 
be termed comical. 

The record shows and this brief will discuss at length 
the innumerable falsities expounded by the Union, its 
agents, organizers and adherents as to the purpose 
and effect of the cards at the time they were being 
circulated and the fact that numerous signator-em- 
ployees were duped as a result of the Union's culpable 
misrepresentations and executed cards as a direct con- 
sequence of these misrepresentations. As a result of 
what can only be labeled a deliberate attempt by the 
Union to deceive the employees as to the purpose and 
use of these cards, there was created during this crit- 
ical period of time an almost universal belief shared 
by most employees that these cards were to be used 
to bring about an election. Whether the adverb "solely" 
or "only" or "merely" or "strictly" is applied, in the 
final analysis, numerous employees believed, based upon 
Union misrepresentations, that the card had one pur- 
pose: an election. There was created throughout the 
plant, therefore, by design on the part of the Union, 
a general atmosphere that these cards would bring about 
an election and that the employees could then register 
their views. 

At the outset, we note that the utilization of cards 
to gain recognition without an election is fraught with 



—17— 

serious drawbacks and has received limited acceptance. 
Indeed, the Board itself has long recognized their un- 
reliability. In Simhcam Corp., 99 NLRB 546, 550-51 
(1952), the Board labeled cards a "notoriously unre- 
liable method of determining majority status of a union. 

The gravaman of the instant dispute is that the 
Board has in recent times adopted a policy of accepting, 
at face value, the language of cards signed by employees 
as to their intention to designate the union as their 
bargaining representative unless, and only unless, union 
solicitors for these cards misrepresented their purpose 
by asserting that the cards were to be used "only" or 
"solely" for purposes of an election. This peculiar 
policy has been denounced by almost every Circuit 
Court in numerous cases in recent years and, indeed, 
it is in contravention of the Board's earlier policy as 



8And see 75 Yale Lcnv Journal 804, 818-819 (1966) where it 
is stated: 

"Authorization cards are an unreliable index of employee 
choice. Compared with the secret ballot they replace, their 
solicitation is a woefully defective process, guaranteeing to 
employees neither a free nor a reasoned choice. Their admit- 
ted inferiority to a properly conducted secret ballot should 
preclude their use absolutely when the employer has not 
committed an unfair labor practice interfering with employee 
free choice. And even when the employer does illegally inter- 
fere with free choice, authorization cards are so unreliable 
that a re-run election — or two or three or ten — better pro- 
tects employee freedom. A causal relationship between em- 
ployer misconduct and election results has never been proven, 
despite statistical and scientific case studies. It is as likely as not 
that a union loss, even when the employer has committed 
unfair labor practices in the campaign, accurately reflects 
employee wishes. Statistics on authorization cards, on the 
other hand, have corroborated their unreliability. It is ironic 
that the Board denies an election or re-run in order to pro- 
tect employee free choice and then orders bargaining on the 
basis of cards which offer even less protection." 



—18— 

established in Englewood Lumber Company, 130 
NLRB 394 (1961), where Respondent stated: 

"In these circumstances, considering only what 
the employees were told, and not what may or may 
not have been their subjective reaction to what 
they were told, we do not think it can reasonably be 
said that the employees, by their act of signing 
authorizations, thereby clearly manifested an 
intention to designate the Union as their bargain- 
ing representative." 

Respondent, however, in the instant case clearly ad- 
hered to its present but indefensible policy of accepting 
at face value cards when the magic words "only" or 
"solely" were not explicitly utilized by union solicitors 
in representing that the purpose of the cards was 
to have an election. 

This "blind" approach to the validity of cards has 
been rejected by almost every Circuit Court confronted 
with the question. Each of them has pointedly and 
emphatically spurned the Trial Examiner's critical con- 
clusion in this case that "One who preferred not to have 
a Union would probably prefer also not to have an 
election and would not sign a card." [C. T. 29, lines 
11-40]. 

Recently, the Fifth Circuit in Engineers & Fab- 
ricators, Inc. V. NLRB, 376 F. 2d 482 (1967) met 
this same issue. According to that court, testimony 
before the Trial Examiner indicated that frequently 
employees' signatures were obtained by telling them that 
the card was not for union membership but rather to ob- 
tain an NLRB election. As the court sees it, the 
Board relies on the rule that : 

". . . if such cards as these are solicited by a 
statement that they are to be used to get an elec- 
tion, but are later used to prove majority status, 



—19— 

there is no misrepresentation. According to the 
Board, if would require a statement that the cards 
were used only to get an election to constitute 
misrepresentation. " 

Judge Coleman's opinion for the court comments that 
the Fifth Circuit "has previously shown its impatience 
with such contentions." The court further stated: 

"The Board has the same burdens and obligations 
as any other litigant who takes the affirmative, and 
must prove its charge. NLRB v. Riverside Mfg. 
Co., 5 Cir. 1941, 119 F. 2d 302. Therefore, the 
general counsel had the burden of showing that 
the cards authorized representation. . . . 

"When cards are challenged because of alleged 
misrepresentations in their procurement, the gen- 
eral counsel must show that the subjective intent 
to authorize union representation was not vitiated 
by such representations. Here the Board did not 
apply this legal standard. Instead it contends that 
', . . documents timely executed which unequiv- 
ocally authorize a labor organization to act as 
the collective-bargaining agent of the signers 
must be treated as valid bargaining authoriza- 
tions in the absence of a showing of coercion in 
their procurement of representations that de- 
spite the purpose clear and expressly stated on 
the cards themselves the cards would be used 
only for a different more limited purpose. Aero 
Corp., 149 NLRB No. 114, 57 LRRM at 
1490.' 

"This applies too lax a standard, and therefore the 
burden was not met. The point is that the Board 
applied the facts to the wrong legal standard 
because there was no probing into the subjective 
intent of the challenged signers." 



—20— 

While there niay be some difference of opinion as to 
whether subjective intent, per se, is a proper factor to 
take into consideration — a matter which we shall later 
discuss at length — there is no question (1) that the 
court in Engineers & Fabricators rejected the Board's 
policy outright and (2) recognized the essential re- 
quirement that all misrepresentations which lead to 
employees being duped into signing authorization cards 
are not only proper but necessary matters of inquiry. 
In the instant case, as will be pointed out below, it is 
not necessary (although probably proper) to delve into 
employees' subjective intent; it is surely necessary and 
proper, however, to analyze the nature of the misrep- 
resentations which both Respondent and the Trial 
Examiner summarily ignored. 

The Second Circuit was equally emphatic in reject- 
ing the Respondent's cavalier treatment of union mis- 
representations in these circumstances. In NLRB v. S. 
E. Nichols Company, 380 F. 2d 438 (2d Cir.. 1967), 
the court was confronted with a similar, indeed scarcely 
distinguishable situation. There, the court stated, 
initially : 

"The Board makes much of the supposed clarity 
of the cards used by the Union in this case, in con- 
trast to the deceptive or ambiguous ones in other 
instances where it nevertheless upheld the union 
. . . But while clarity should constitute the be- 
ginning of any effort to show a majority on 
the basis of authorization cards, it is not the end; 
the clearest written words can be perverted by oral 
misrepresentations, especially to ordinary working 
people unversed in the 'witty diversities' of 
labor law. It is all too easy for the Board or a re- 
viewing court to fall into the error of thinking 
that language clear to them was equally clear to 
employees previously unexposed to labor relations 



—21— 

matters; to treat authorization cards, which 
union organizers present for filling out and sign- 
ing and then immediately take away, as if they 
were wills or contracts carefully explained by a 
lawyer to his client is to substitute form for 
reality. The very argument by which the 
Board has upheld unions even when the cards were 
deceptively worded, namely, of placing 'more em- 
phasis upon the representations made to the em- 
ployees at the time the cards were signed than 
upon the language set forth in the cards' NLRB 
V. Winn-Dixie Stores, Inc., supra, 341 F.2d at 
754, works against it here. In our view the evi- 
dence demands a conclusion that at least three of 
the signers were induced to affix their signatures 
by statements causing them to believe that the 
union would not achieve representative status with- 
out an election." 

One of the employees in the ^S. E. Nichols case had 
been told by the union representative that "There would 
have to be an election and if she wanted to change 
her mind, she could." Another one stated that the 
union organizer said he was soliciting cards "for the 
purpose of representing the union, to petition the 
NLRB in Washington as representative of the em- 
ployees at Nichols to investigate the conditions in the 
store, and that if I signed the card I would not be 
joining the union . . ." and "In order to get the 
union in the store an election would have to be held 
in the store." A third employee was given similar 
assurances and interpretations of the purpose of the 
card. As in the instant case, the cards were essen- 
tially unambiguous and manifested an intention, on 
their face, to designate the union as the signer's col- 
lective-bargaining agent. 



—22— 

The Second Circuit reviewed most of the case law 
existing at the time and distinguished those cases 
wherein the union clearly advised employees that the 
cards could be used either for an election or for recog- 
nition without an election. The court went on to 
state : 

'Tt is quite a different matter to permit a union 
to attain recognition by authorization cards pro- 
cured on the affirmative assurance that there 
would be an election without a further clear ex- 
planation that the cards can and may also be 
used to obtain recognition without any subsequent 
expression of preference by the employees; such a 
half-truth gives the employees the false impres- 
sion that they will have an opportunity in all events 
to register their true preferences in the secrecy 
of the voting booth. As has been well said, Note, 
supra, 75 Yale L.J. at 826 : 

Tf the employee thinks the cards will lead 
to a secret ballot, he can insure himself against 
the possibility of future retaliation and prevent 
harassment only by signing. Such an employee 
may sign a card planning to vote against the 
union or at least intending to reserve decision 
until he hears the employer's views or talks to 
fellow employees.' 

"We decline to encourage such an impairment of 
employees' §7 rights." 

Thereafter, the same court, in NLRB v. The Goluh 
Corporation, 388 F. 2d 921 (2d Cir., 1967), reaffirmed 
its Nichols position. Indeed, in that case the misrep- 
resentations made to the employees are exactly the 
same as those in the instant case and both the Board 
and the Trial Examiner in each of the cases treated 
them exactly the same — i.e., upheld the validity of the 



—23— 

cards notwithstanding the misrepresentations. The Sec- 
ond Circuit, however, stated : 

"The Trial Examiner's conclusion as to ma- 
jority status rested on the legal premise which we 
have declined to adopt, NLRB v. S. E. Nichols 
Co., 380 F.2d 438, 444-45 (1967), that even though 
a union has led signers of authorization cards to 
believe that it would obtain representative status 
only by winning an election, a card clear on its 
face is valid unless the employee was told that its 
sole purpose was to obtain an election — words such 
as 'sole,' 'merely,' 'just,' or 'only' being in- 
vested with a kind of talismanic quality . . ." The 
Board has not asked us to enforce the order on the 
grounds that Pepe's or Petrignani's cards were 
valid nor has it sought a remand for resolution of 
the credibility issue. Rather, conceding that the 
card of Marcella McCarthy also was invalid under 
the Nichols rule, it seeks enforcement on the basis 
that there are still enough valid cards to constitute 
a majority. We disagree ; the cards of Eleanor Car- 
bone and Vincent Zielnicki were also obtained by 
misleading the signers into the behef that the union 
would not become their representative unless it 
won an election. Freddie Russom, the solicitor who 
approached Pepe, Petrignani and McCarthy, had 
also solicited the card of Louis Peluso, telling him, 
in Peluso's words, that by signing a card 'I didn't 
have to obligate myself to the union just that I 
would sign the card and I didn't have to join if 
I didn't want to,' and had obtained the cards of 
five other employees only one of whom testi- 
fied. Question has been raised whether proof of a 
pattern of misrepresentation by a particular solici- 
tor may not require the General Counsel to come 
forward with testimony by all signers. Lesnick, 



—24— 

Establishment of Bargaining Rights Without an 
NLRB Election, 65 Mich. L. Rev. 851, 857-58 
(1967). The Trial Examiner ruled against this on 
the basis that, under the 'sole purpose' rule, only- 
two of Russom's solicitations could be faulted and 
no pattern of misrepresentation had been shown; 
if the correct figure was four out of five, a dif- 
ferent result might follow. We therefore decline 
to enforce so much of the Board's order as holds 
that the company's refusal to recognize the union 
violated §8(a)(5) and turn to the alleged viola- 
tions of §8(a) (1)." 

Soon after the Second Circuit rejected Respondent's 
position, the Fourth Circuit in even more pointed lan- 
guage did likewise. In NLRB v. S. S. Logan Packing 
Company, 386 F. 2d 562 (4th Cir., 1967), still another 
case involving the application of Berncl Foam reached 
the circuit court. And once again, still another circuit 
court found it necessary not only to reject Respondent's 
peculiar position but to admonish it against continuing 
its practice. The court said : 

"It would be difficult to imagine a more un- 
reliable method of ascertaining the real wishes of 
employees than a 'card check,' unless it were an 
employer's request for an open show of hands. 
The one is no more reliable than the other. No 
thoughtful person has attributed reliability to such 
card checks. This, the Board has fully recognized 
[citing cases]. So has the AFL-CIO [AFL-CIO 
Guidebook for Union Organizers (1961), quoted 
in Senate Hearings on § 14(b), 190.]. In 1962, 
Board Chairman McCulloch presented to the Ameri- 
can Bar Association data indicating some rela- 
tionship between large card-signing majorities and 
election results [1962 Proceedings: Section of La- 
bor Relations Law, American Bar Association 14- 



—25— 

17]. Unions which presented authorization cards 
from thirty to fifty per cent of the employees won 
nineteen per cent of the elections; those having 
authorization cards from fifty to seventy per cent 
of the employees won only forty-eight per cent of 
the elections, while those having authorization cards 
from over seventy per cent of the employees won 
seventy-four per cent of the elections. This sug- 
gests that the greater the majority of authoriza- 
tion cards, the greater the likelihood of a union 
election victory, but, obviously there are exceptions. 
Though ninety per cent of the employees may 
have signed cards, a majority may vote against 
the union in a secret election. Overwhelming ma- 
jorities of cards may indicate the probable out- 
come of an election, but it is no more than an in- 
dication, and close card majorities prove nothing. 

"The unsupervised solicitation of authorization 
cards by unions is subject to all of the criticisms 
of open employer polls. It is well known that many 
people, solicited alone and in private, will sign a 
petition and, later, solicited alone and in private, 
will sign an opposing petition, in each instance, 
out of concern for the feelings of the solicitors 
and the difficulty of saying 'No.' [See, e.g., rec- 
ognition in the Organizer's Guidebook, supra, of 
the fact that some cards are signed to 'get the 
union off my back.'] This inclination to be agree- 
able is greatly aggravated in the context of a union 
organizational campaign when the opinion of fel- 
low-employees and of potentially powerful union 
organizers may weigh heavily in the balance. 

"That is not the most of it, however. Though 
the card be an unequivocal authorization of rep- 
resentation, its unsupervised solicitation may be 
accompanied by all sorts of representations. 'We 



—2(y- 

need these cards to get an election. You believe 
in the democratic process, don't you? Do you want 
to deny people the right to vote? Isn't it our 
American way to resolve questions at the polls? 
Do you want to deprive us of that right? Are you 
a Hitler or something? . . . 

"The unreliability of the cards is not dependent 
upon the possible use of misrepresentations and 
threats, however. It is inherent, as we have noted, 
in the absence of secrecy and in the natural in- 
clination of most people to avoid stands which ap- 
pear to be nonconformist and antagonistic to 
friends and fellow employees. It is enhanced by the 
fact that usually, as they were here, the cards 
are obtained before the employees are exposed to 
any counter argument and without an opportunity 
for reflection or recantation. Most employees hav- 
ing second thoughts about the matter and regret- 
ting having signed the card would do nothing 
about it; in most situations, only one of rare 
strength of character would succeed in having his 
card returned or destroyed. Cards are collected over 
a period of time, however, and there is no assur- 
ance that an early signer is still of the same mind 
on the crucial date when the union delivers its bar- 
gaining demand. 

"For such reasons, a card check is not a re- 
liable indication of the employee's wishes." 

The issue became still more pointed in a companion 
Fourth Circuit case, Crawford Manufacturing Co., Inc. 
V. NLRB, 386 F. 2d 367 (4th Cir., 1967). The facts 
there are practically a carbon copy of those existing in 
the instant case. The evidence there showed that the 
union repeatedly emphasized to employees that the au- 
thorization cards it was soliciting would be used to 
bring about an election. 



—27— 

"At the very least, the findings of the exam- 
iner and the testimony of the employees make an 
issue of whether the cards were signed as a power 
to the union to act for the employees. Put the 
other way, the issue is made whether the cards 
were signed solely to procure an election. 

"On the question whether the cards evidenced 
an intentional and intelligent authorization by a 
majority of the employees to the union to repre- 
sent them, we think the burden of proof was on 
the General Counsel of the Board. Engineers & 
Fabricators, Inc. v. NLRB, 2>76 F.2d 482, 487 
(5 Cir. 1967) ; Peoples Service Drug Stores, Inc. 
V. NLRB, 375 F.2d 551, 556, 557 (6 Cir. 1967). 
Regardless, however, of where the burden lay, we 
are obligated to scrutinize the entire record and 
ascertain whether there is substantial evidence for 
the Board's finding here that the union, when it 
demanded recognition, was representing a majority 
of the employees. National Can Corporation v. 
NLRB, 374 F.2d 796, 804 (7 Cir., 1967). 

"The examiner here stated, with ample justifi- 
cation, that there was considerable confusion: 
some employees thought that by signing the cards 
they were only calling for an election, and others 
were confused by the union's representations as 
to the significance of the cards. Actually, if we 
spell out of the cards the meaning attributed to 
them by the examiner — a dual purpose, first the 
call of an election and then admission to member- 
ship — the doubt still lurks, for even then the ap- 
plicant's membership is, in his own mind, condi- 
tioned on a union victory in the election. Proof 
of such a prevalent and pervading misconception 
when generated by the union organizers' represen- 



—28— 

tations cannot be ignored. It is not decisive that 
the cards in their terms contained no suggestion 
that they signified anything less than a direct 
grant of authority for the union to act as collec- 
tive agent for the employees. Despite the regard 
we hold for the contrary opinion, e.g., NLRB 
V. Cumberland Shoe Corp., 351 F.2d 917, 920 
(6 Cir. 1965) and cases there cited, we will not 
stick mechanically to the literal phrasing of the 
cards. A ghost of the parol evidence rule, such 
literalism subordinates what really counts : the ac- 
tual understanding of the signers . . . 

"In fine, when as here substantial evidence does 
not show that the employees signed authorization 
cards free of any misapprehension of their pur- 
pose, a union majority entitling the union to rep- 
resentation cannot be said to have existed. Indeed, 
for the employer to have recognized it in these 
circumstances would have been a usurpation of the 
choice of a representative when by Section 9(a) 
of the Act. the selection belongs to the employees. 
In the face of such a doubt as presently appears, 
recognition by the employer is forbidden by law. 
Garment Workers v. XLRB, 366 U.S. 731, 737 
(1961)."' 

While the court in Crawford may have possibly en- 
tertained the acceptance of evidence going to the sub- 
jective intent of the employees who signed cards, this 
factor was not the crux of the court's decision. A care- 



^That the Fourth Circuit does not take the position that au- 
thorization cards may never be used in lieu of an election to gain 
recognition is clear bv a later case from that circuit. NLRB v. 

Lifetime Door Com f any, F. 2d (4th Cir., 1968). 

There the court examined the record carefully and concluded that 
because "there is no hint of impropriety in the solicitation or 
execution of the cards . . ." the Board's order was justified. 



—29— 

ful reading of the Crawford case indicates that the 
Fourth Circuit has aligned itself with most other cir- 
cuits which have refused to stick mechanically to the 
literal phrasing of the cards when presented with whole- 
sale misunderstanding as to their purpose created by 
the union. The evidence that the Fourth Circuit said 
was proper to consider in weighing the validity of the 
cards is what was said to the employees at the time the 
cards were solicited. The subjective understanding of 
the employees solicited is an aid in determining the na- 
ture of the misrepresentations. The Court need not ig- 
nore this factor. At any rate, in the instant case, as 
will be shown below, not only did the Trial Examiner 
and Respondent reject any evidence as to what the em- 
ployees actually believed to be the purpose of the cards, 
but they completely and unquestionably ignored the 
plethora of evidence that these employees were unmis- 
takably misled as to the purpose of the cards. Thus, 
though some evidence of subjective intent under these 
circumstances is proper, it is neither necessary nor cru- 
cial in the premises because the evidence was over- 
whelming that the Union made wholesale misrepresen- 
tations in an effort to obtain cards. 

The Associate General Counsel for the NLRB in a 
talk in February 1968 stated: 

"The Board has chosen the Crawford case as the 
most appropriate vehicle available up to now for 
seeking Supreme Court review of the authoriza- 
tion-card issue. Petition for certiorari has just 
very recently been filed." (Gordon, "Union Au- 
thorization Cards and the Duty to Bargain" Daily 
Labor Report, 33 BNA, Feb. 15, 1968.) 

In April, 1968, the Supreme Court denied certiorari. 

In March 1968, the Fifth Circuit was again met 
with still another case indistinguishable from the in- 



—30— 

stant one, NLRB v. Lake Butle7- Apparel Company, 
.... F. 2d .... (5th Cir., 1968). Once again, a circuit 
court rejected the Board's position and specifically dis- 
agreed with and indeed criticized the Board rule, for- 
merly approved by the Sixth Circuit, that cards were 
valid unless the Union solicitor had stated to the em- 
ployee that the only and sole purpose of executing the 
card was to obtain an election. Cumberland Shoe Corp., 
144 NLRB 1268 (1963), enfd., NLRB v. Cumberland 
Shoe Corp., 351 F. 2d 917 (6th Cir., 1965). 

The Fifth Circuit recognized that the cards used at 
the Lake Butler Apparel Company had no reference 
to an election on them. Nonetheless, the Union solicitor 
had indicated to the employees that they were to be 
used to "petition for an election and that if we won 
the election we would be their bargaining representa- 
tive." 

The General Counsel had the burden of proving 
that the cards were not executed for the limited pur- 
pose of an election, the Court said, but he failed to 
carry that burden in connection with at least seven 
employees. They testified that they signed the cards 
only to get an election, and six were told that they could 
vote for or against the Union at the election. The 
Court said : 

"These representations were not denied by the 
solicitors and their clear import is that they were 
false in light of the turn of events whereby the 
union is claiming recognition without an election. 
Our view is that they were conditions which at- 
tached to the fact of the card executions. The lan- 
guage printed on the reverse side of the cards 
[providing for union membership and check-off], 
which the employees did not read and no copy of 
which was left with them, must give way to the 



—31— 

agreement negotiated in each case between the 
solicitor and the employee. 

"Because the record will not support a finding 
that the General Counsel overcame the testimony 
of these employees that they executed the cards 
on a misrepresentation of fact, it follows that 
these employees must be eliminated from the total 
of Z7 . Thus the union did not have a majority on 
May 19, 1964, the crucial date." 

In rejecting the Cumberland Shoe rule, the Court 
said that while that rule may simplify the problem of 
evidence, "there are countervailing policy considera- 
tions." The rights involved are those of the employees, 
the Court said, and concluded, "A rule of convenience 
such as that formulated in Cumberland Shoe must give 
way to truth based on the record considered as a whole." 
Such is the case here. 

Recently, even the Sixth Circuit has recognized that 
the Cumberland rule, which it had formerly approved, 
simply cannot be adhered to in cases of this sort and it 
retreated from its previous position. The first case in 
which the Sixth Circuit began to restrict the Cumber- 
land rule was in Dayco Corp. v. NLRB, 382 F. 2d 
577 (6th Cir., 1967). The Court there recognized that 
the Union agent had misled employees into signing cards 
by emphasizing that the cards were necessary in order 
to secure a Board election. Citing Bauer Welding and 
Metal Fabricators, supra, the Court said, "where the 
union has engaged in such misrepresentation, cards so 
obtained are not necessarily a valid designation of a col- 
lective bargaining representative." The Court found 
this especially true when the cards themselves includ- 
ed the holding of an election as one of its purposes. 
Therefore, viewing the evidence as a whole, the Court 
concluded the Board had not produced substantial evi- 



—32— 

dence to support the assertion that the union had pos- 
sessed a valid majority. 

A few months thereafter, the Sixth Circuit was 
again met with this now typical situation in NLRB v. 
Swan Super Cleaners, 384 F. 2d 609 (6th Cir. 1967). 
The Trial Examiner and Board in that case had reject- 
ed the company's claim that certain cards were void be- 
cause Union solicitors had represented to the signers 
that the cards were to be used to obtain a Board elec- 
tion. In trying to ascertain whether the Union had a 
majority, the Court, assertedly "obedient" to its deci- 
sion in Cumberland Shoe, nonetheless carefully inspect- 
ed the evidence surrounding those cards which were 
the product of the signers' belief that they were to be 
used only to obtain an election. After examining that 
evidence, the Court stated : 

"We at once make clear that we do not con- 
sider testimony of a subjective intention not to 
join the union as of controlling importance. See 
Joy Silk Mills v. NLRB, 185 F(2) 732, 743 (CA 
D.C. 1950) cert. den. 341 U.S. 914. But it is rele- 
vant in assessing the effect of the solicitor's 
words, for it casts a telling reflection on the ac- 
tual communication conveyed to the signer. The 
testimony of the signer as to his expressed state 
of mind is also relevant in determining whether 
his misapprehension over the purpose of the card 
was knowingly induced by the solicitor. Such in- 
ducement of an employee who openly expresses an 
intention not to join the union suggests that rep- 
resentations concerning an election were intended 
to lead to a belief that the only purpose of the 
card was to hold an election. . . . 

"We think it right now to say that we do not 
consider that we have announced a ride [referring 
to Cumberland, supra] that only where the solicitor 



—33— 

of a card actually employs the specified words 'this 
card is for the sole and only purpose of having an 
election' will a card be invalidated. We did not 
intend such a narrow and mechanical ride. We 
believe wluxtever the style of actual words of the 
solicitation, if it is clearly calculated to create in 
the mind of the one solicited a belief that the only 
purpose of the card is to obtain an election, an 
invalidation of such card does not offend our 
Cumberland ride. . . . (Emphasis supplied.) 

"It appears that the examiner's position was, 
and the Board's position now is, that unless the 
solicitor has actually employed the words 'sole' or 
'only' in his sales talk, our opinion in Cumber- 
land insulates the solicitation from condemnation, 
no matter what its other vices. We do not be- 
lieve the language employed in Cumberland sug- 
gests any such mechanical interpretation. The 'out- 
right misrepresentation' referred to therein could 
certainly be accomplished by other words than 
'sole' or 'only.' A sophisticated and only modestly 
talented union agent could easily live with such 
a narrow rule and, leaving out the bad words — 
'sole' and 'only' — employ language clearly calculat- 
ed to lead a laundry worker to believe that the 
holding of an election was all that she signed up 
for." 

The type of evidence that the Court examined is un- 
questionably indistinguishable from that involved in the 
instant case, as will be seen below. The exact same 
type of statements were made by Union solicitors in 
each of the cases. Indeed, here the Union's own liter- 
ature, as will be shown, further stressed that the pur- 
pose of the card was simply to have an election. 

In denying enforcement of the Board's order in Swan 
Super Cleaners, the Sixth Circuit cited with approval 



Judge Friendly's statements made in NLRB v. S. E. 
Nichols, supra. All of these cases, as can be seen, have 
now almost become stereotype. The Union does every- 
thing in its power to convince the employees that the 
cards will be used for an election, notwithstanding 
the wording of the cards and has, up until recently, 
gotten away with this ploy by not using the words 
"solely" or "only." Now almost every circuit court that 
has met the issue has refused to condone this type of 
union practice; and the Supreme Court has effectively 
refused to support the Board. 

In March of this year, the Sixth Circuit again re- 
jected the Board's unfettered utilization of authoriza- 
tion cards. In NLRB v. Shelby Mann factoring Com- 
pany, 390 F. 2d 595 (6th Cir., 1968) the court, in citing 
many of the cases already referred to herein, stated that 
the misrepresentation was made more clear in light of 
the fact that the "card solicitors did in fact represent to 
a number of employees that their purpose was to secure 
an election. The Examiner in his decision stated: 

'Several witnesses testified that the talk all over the 
plant during the campaign was about having an 
election.' " 

The exact situation here existed in the instant case — 
only magnified. 

The Seventh Circuit has recently joined the tide in re- 
jecting the Board's position in these situations. In 
NLRB V. Dan Hozvard Manufacturing Co., 390 F. 2d 
304 (7th Cir., 1968), among other issues involved was 
the question of the validity of a card signed by an em- 
ployee on the basis of a misrepresentation that the card 
merely admitted her to a Union meeting and permitted 
her to vote for the Union. The representations made 
to this and other employees, as set forth by the circuit 
court in an appendix to its opinion, are a carbon copy 



—35— 

of the misrepresentations that existed in the instant 
case. The court there reviewed case authority in the 
field in Hght of the evidence and conckided that the 
testimony clearly inferred that the employee's card in 
question was obtained because the employee was led to 
believe that it would grant the Union an opportunity to 
have an election. The court rejected the Board's rule in 
Cumberland and concluded : 

"In the recent case of NLRB v. Swan Super 
Cleaners, No. 16952 (October 25, 1967), the Sixth 
Circuit, through Judge O'Sullivan, explained its de- 
cision in Cumberland, expressly disavowing the 
view that Cumberland held that the very word 
'sole' or 'only' was needed to invalidate a card. The 
court adhered to Cumberland, saying that its rule is 
not offended by invaHdating cards, no matter what 
style or wording was used by the organizer 'if it 
is clearly calculated to create in the mind of the 
one solicited a belief that the only purpose of the 
card is to obtain an election.' The court pointed 
out that it is relevant to consider the subjective in- 
tention of the signer and his expressed state of 
mind in deciding whether a misapprehension was 
knowingly induced. 

"We apply the restatement in Swan of the 
Cumberland rule and hold that 'in its total context' 
the only reasonable inference that can be drawn 
from the Weiner-Burdette colloquy, as testified to 
by her, is that statements made by Weiner created 
in Burdette's mind a misapprehension as to what 
signing the card meant and that her signature on 
the card did not represent an intention to designate 
the Union as her bargaining agent. "^" 



^''Even more recently the Eighth Circuit has reaffirmed its 
position in Bauer Welding and Metal Fabricators, supra, and reas- 
serted on March 12, 1968, in NLRB v. Arkansas Grain Corp., 
(This footnote is continued on the next page) 



—36— 

In light of the great weight of authority discussed 
above, an examination of the facts in the instant case 
will demonstrate beyond argument that that authority 
and logic is controlling in the instant situation. 

The facts in the instant case show : 

The Union, in its written communications to the 
employees, from the very start made it clear beyond 
contention : 

(1) That the Union was attempting to have an 
NLRB election conducted in Petitioner's plant (as well 
as other plants) and that cards were being solicited 
for that purpose; 

(2) That if sufficient cards were obtained, there 
would be an election; 

(3) That the Union never stated it would attempt 
to use the cards for any other purpose but to have an 
election ; 

(4) That the Union never attempted nor did it ad- 
vise the employees in any understandable manner that 
the cards could or would be used for any other pur- 
pose; and 

(5) That most, if not all, of the employees in Pe- 
titioner's plant believed, based upon the Union's rep- 
resentations, that the only purpose of the cards was to 
have an election and acted in reliance on those rep- 
resentations. 

F. 2d (8th Cir., 1968) that cards may be a totally un- 
reliable indication of majority status. (See footnote 4 therein.) 
It would appear that the Tenth Circuit, as well, has held that 
cards are subject to a far more severe test than the Board would 
apply in proving their validity. The Tenth Circuit in NLRB v. 
Midzvestern Manufacturing Co., Inc.. 388 F. 2d 251 (10th Cir., 
1968), in rejecting the Board's position to require an order to 
bargain, examined critically this question. 



—27— 

B. The Facts Relating to the Union's Gross 
Misrepresentations. 

The first communication which was circulated to the 
employees by the Union that is in evidence is a letter 
signed by Vincent Sloane, the UAW representative, 
dated March 3, 1965 [R. Empl. Ex. 4]. This letter, 
which was circulated and sent to "All Tool and Die 
Workers in Southern California," discussed the or- 
ganizing drive of the UAW, the advantages of union- 
ization, the meetings that were being held and con- 
cluded as follows : 

"It is estimated that by March 14, a number 
of shops will be in a position to petition for elec- 
tions. It is 'Oiir intention to petition for each shop 
at the paint where a substantial majority of the 
shop employees have signed and mailed in their 
Authorization Cards. I therefore urge you to make 
every effort to see that your shop is signed up at 
the earliest possible date. . . ." (Emphasis supplied.) 

It is patently clear that from the start the Union 
made it clear to all employees involved that it was go- 
ing to attempt to use the cards for one purpose — to pe- 
tition for an election. No other purpose was even faint- 
ly suggested. 

The second communication, which appears to fol- 
low up the letter of March 3, is R. Empl. Ex. 5, 
dated IMarch 10, 1965, also signed by Sloane. This let- 
ter, which was also sent or circulated to "All Tool and 
Die Workers in the Southern CaHfornia Area," began 
as follows : 

"I am pleased to announce that the UAW Or- 
ganizational Drive now in progress to organize 
all of the tool and die industry in Southern CaH- 
fornia is proceeding at an encouraging and rapid 



—38— 

pace. Signed UAW Authorization Cards from al- 
most all of the plants involved are being received 
every day. At this point in the campaign, a nmn^ 
her of the plants involved are almost ready to 
petition for their secret ballot representation elec- 
tions. (Emphasis supplied.) 

Once again, the Union told all employees that the pur- 
pose of these cards was to petition for a secret ballot 
representation election; and once again, not the slight- 
est hint that cards were being collected for any other 
purpose. 

But if there were any doubt at all as to the Union's 
program of deception in misrepresenting to employees 
that the cards were only to be used for purposes of an 
election, such doubt was resolved by the Union's dis- 
tribution of what is entitled "UAW Fact Finder" 
[R. Empl. Ex. 6]. Not only did the Trial Examiner 
give Httle or no attention to R. Empl. Exs. 4 and 5, 
but he, enigmatically, summarily dismissed the very ex- 
istence of R. Empl. Ex. 6. Clearly, his actions in this 
regard cannot be sustained. This clever piece of prop- 
aganda was distributed to the employees at Union meet- 
ings during the period that the Union was soliciting 
cards. It is drafted in the form of a questionnaire 
wherein the employee is to check off which of three 
alternative answers to each question is the correct one. 
The questions are extremely revealing as to what the 
Union was trying to connote to the employees and the 
suggested answers, one of which was presumably true, 
are even more revealing. Virtually all of these questions 
deal solely with the question of an election, as can be 
seen by a copy of R. Empl. Ex. 6, attached herein as 
Appendix "A". 

The first question and set of possible answers deals 
with the percentage of cards of employees required to 



—39— 

have a secret ballot representation election. The second 
question considers the most effective way to obtain cards 
from employees. The third statement and the possible 
alternative answers reads as follow : 

"When a tool and die worker signs a U.A.W. 
Authorization Card, it means that — 

A. He will definitely vote 'YES' for 

the U.A.W. on Election Day. □ 

B. If the employee knows very little 
about the U.A.W., its contracts 
and achievements, he may still be 
swayed by last minute Company 
letters and captive audience meet- 
ings to vote for the Company. Q 

C. He is just trying to get the Volun- 
teer Organizer off his back." Q 

Thus, in plain, unambiguous language, the Union told 
the employees that the card means one of the above 
three things. Nothing whatsoever either in that state- 
ment or in any other statement in R. Empl. Ex. 6 
(or in any other communication in evidence) remotely 
hinted that the cards were to be used for any other 
purpose. No reasonable man can read R. Empl. Ex. 6 
(as well as the other Exhibits) and conclude other than 
that the Union made a deliberate attempt to make em- 
ployees believe that cards were for one purpose and 
one purpose only: to have an election. All the other 
questions on that document discuss the secret ballot 
representation election. All this long before the Union 
ever filed a petition for an election and all this during 
the time that the Union was actively soliciting cards. 
Surely, such deception not only taints and clouds the 
cards that were signed under these circumstances but 
makes them totally unacceptable for any purpose. The 



Trial Examiner and Board could not explain R. Empl. 
Ex. 6 in light of their reasoning and findings, so they 
simply ignored it, as they essentially did with the other 
germane exhibits. 

In an attempt to escape the powerful impact of the 
misrepresentations contained in the Union's literature, 
Union representative, Sloane, testified that at one of 
the many meetings the Union had, held on February 
28, 1965, he advised the employees there of the proce- 
dure under the NLRA and read to them a demand let- 
ter previously sent to the Cadillac Gage Company in 
Costa Mesa [G.C. Ex. 36] which, he asserted, would 
have advised the assembled employees that the Union 
would, in the instant case, use the cards for the pur- 
pose of demanding recognition without an election. He 
further testified that he told the employees, based upon 
his experience, that companies never recognize unions 
based upon such demand letters and that there would 
undoubtedly have to be an election [R. T. 693, line 11, 
to 697, line 23]. 

Throughout the long hearings, dozens of employees 
were called upon to testify by both parties. Of these 
many employees, some 23 gave testimony indicating 
that they were present at one or more of the Union 
meetings held in February and March of 1965. In not 
a single instance did any of these employees testify 
that Sloane read the material he claimed to have read. 
In fact, 14 of these employees were called by the Board 
and not one of them supported Sloane's testimony; in- 
deed, at least four of them pointedly contradicted him. 
Even among the Union's most stalwart supporters there 
is no support for Sloane's testimony, though these em- 
ployees were present at the meetings where he spoke 
(See testimony of Cantrell, I. Klein, Rawl. Ahlstrom, 
Burke, Williams, Hughes, Wright, Kastendick and A. 



—41— 

Crandall). Of the four General Counsel's witnesses 
who described what Sloane had said at these meetings, 
Virgil testified that at the meeting he attended, Sloane 
stressed the importance of the cards and said the more 
cards that the Union had signed, the greater the chance 
of winning the election [R. T. 374, lines 2-11] and 
testified to nothing about Sloane advising the employees 
that they could be represented by the Union without 
an election. Kofink, called by the General Counsel, 
testified on cross-examination that he attended the 
meeting of February 28 (the same meeting that Sloane 
discussed in his testimony) and in regard to what 
Sloane said, Kofink testified : 

"A. It seems to me that it was stressed that as 
many — to get as many cards as possible signed in 
order to have an election. . . . 

Was anything said by Mr. Sloane about the 
Uriion representing the employees without an 
election ? 
A. No. 

Q. Did Mr. Sloane say other employees — that 
the people there should get other employees to 
sign the cards. 
A. Yes. 

Q. Did he say why? 
A. For that reason. 
Q. To have an election? 
A. Yes. 

Q. Didn't he say the more cards that they 
had, the better chance they had of having an elec- 
tion? 

A. That is correct. 

Q. After he spoke and made these statements 
is when you signed your card; is that correct? 

A That's right." [R. T. 505, line 24, to 506, 
line 23]. 



—42— 

On redirect examination, he testified: 

"Q. Do you recall what he said about a major- 
ity in the cards? 

A. That a certain percentage was needed, 51 
per cent out of 100, I guess. 

Q. For what purpose ? 

A. In order to have an election. 

Q. I see. 

Do you recall Mr. Sloane reading a letter at that 
meeting? [Referring to Cadillac Gage demand 
letter.] 

Mr. Tobin: Objection. 

Trial Examiner : Overruled. 

The Witness: No, I don't." [R. T. 507, line 19, 
to 508, line 22]. 

Robert Weymar testified on cross-examination that at 
that same meeting he recalled Sloane saying : 

"A. He said something — at the end of this 
meeting, he said, 'If anyone has not signed an 
authorization card yet, there will be more avail- 
able for those that haven't signed, and we are try- 
ing to get as many as possible signed to get enough 
power to bring an election about.' 

Q. Did he say anything about having the Union 
represent the employees without an election ? 

A. Not that I recall." [R. T. 518, Hne 23, to 
519, line 5]. 

On redirect examination, Weymar testified: 

"Q. You remember Vincent Sloane talking? 
Now, the best you can recall, what did Mr. 
Sloane say about the organizational campaign at 
Mechanical Specialties ? 

A. I am quite sure he did not mention Me- 
chanical Specialties at that time. He was talking 
about a union campaign in Southern California 



which included certain number of tool and die 
shops. 

Q. I see. 

Now to the best of your recollection, what 
were his words with regard to the authorization 
cards ? 

A. I remember him speaking about a certain 
percentage, which I am not sure of what it was, 
but in connection with the fact that if enough 
employees would sign the cards there would be an 
election held. 

Q. Did he mention anything about the Union 
getting in without an election ? Do you call ? 

A. I don't recall that, no." [R. T. 529, line 
19, to 530, line 13; 531, lines 14-23]. 

Cisneros testified on cross-examination that at a union 
meeting which he attended, Sloane stated that they 
were going to call an election and Cisneros recalled 
that Sloane said at that meeting that all he needed was 
50 per cent to call an election [R. T. 585-586]. 

Nine other employees who were present at meetings 
at which Sloane spoke were called by Petitioner. All of 
those either contradicted Sloane's testimony or could 
not support it. 

Dellomes testified that he attended three meetings 
where Sloane spoke and he recalled him stating that 
the Union had to have a certain number of cards 
"that were enough to gain an election, and we needed 
more cards to show a greater strength of employees 
for the Union." [R. T. 1356]. Polony testified that 
he was under the impression that the cards were for 
the purpose of having an election and that a number 
of employees told him that the statement on the card 
that served as authority for the U.A.W. to represent 
the signer "didn't mean a thing." [R. T. 1372]. He 



—44— 

could recall that at neither of the two meetings he at- 
tended where Sloane spoke was anything said that the 
Union could represent employees without an election 
[R. T. 1375, lines 2-9]. The evidence showed that Es- 
trada attended the meeting of March 14 but his tes- 
timony also fails to support Sloane's assertions. 

Riegler testified he was present at the Union meet- 
ing of March 14 and that he recalled Sloane speaking. 

"A. Yes. As far as I recall, he said they have 
given us cards to sign now, but it is also good 
to get as many as possible, because they are going 
to be a few guys that will change their minds 
until the election. 

Q. Do you recall him saying anything about 
having the Union represent the employees at Me- 
chanical Specialties without an election? 

Mr. Somers: Objection. 

Mr. Arnold: Objection. 

Trial Examiner: I will overrule the objection. 
You may answer. 

The Witness: Not that I recall, sir." [R. T. 
1390, line 25, to 1391, line 11]. 

Booze testified that he attended three meetings where 
Sloane spoke and that he "explained the cards to us. 
He said at such time we would have enough we would 
have an election." [R. T. 1426, lines 12-13]. He fur- 
ther testified that Sloane did not say anything to the 
effect that the Union could represent the employees 
of Petitioner without an election. [R. T. 1427, Hnes 
14-23; 1432, lines 2-19]." Lawrence testified that he 



^^On cross-examination, Booze gave the only semblance of 
support to Sloane's testimony of all the witnesses who testified 
on the subject. He stated that Sloane said that if enough cards 
were signed, they would be presented to the Company but that 
the Company would turn them down and that there would be 
an election [R. T. 1433, lines 3-11]. This statement scarcely 
supports the General Counsel's position in that it is not known 



—45— 

attended Union meetings where Sloane spoke and that 
based upon Sloane's statements made concerning the 
cards : 

"I understand Mr. Sloane to say about the au- 
thorization [cards] that it was for the purposes of 
holding an election." [R. T. 1480, lines 12-14]. 

He further testified on cross-examination, based upon 
what he heard at three or four meetings he attended, 
it was his understanding that if the Union got over 
50% of the cards, they would "demand an election" 
and he recalled nothing being mentioned about a 30% 
figure [R. T. 1484, lines 7-22]. 

Cuda testified that he signed his card at a Union 
meeting and that based upon what was said at that 
meeting, his "recollection was that by signing the card, 
it gives us the right to have an election in the shop." 
[R. T. 1503, lines 3-22]. On cross-examination, he 
could not recall Sloane or anyone else saying that if 
more than 50% of the cards were gotten, the Union 
would ask the company to recognize it [R. T. 1504, 
line 18, to 1505, line 7]. 

Garger also was present at Union meetings where 
Sloane spoke and recalls him saying : 

"A. Well, in order to have an election we would 
have to have at least 30 or 33 per cent. I couldn't 
tell you for sure, the authorization cards signed, 
so the Labor Board would conduct an election." 
[R. T. 1518, lines 2-5]. 

at which of the many meetings Sloane made this statement and 
to how many employees he made it or if he just made the state- 
ment to Booze. Moreover, it certainly did not, nor could it, en- 
lighten Booze or any other employee that the cards would be 
used for any other purpose than to have an election. Indeed, even 
if Sloane were credited against the overhwelming evidence, it 
scarcely supports the General Counsel's position, as the court in 
Crawford, supra, emphasized where essentially the same situa- 
(This footnote is continued on the next page) 



—46— 

Berno attended the meeting of March 14, 1965. He 
testified that at that meeting, R. Empl. Ex. 6 was dis- 
tributed to each of the employees attending the meet- 
ing [R. T. 1723-1724]. He further testified on direct 
examination that at that meeting the Union speakers 
said that if they had enough shops going that they 
would force the Southern California Tool and Die As- 
sociation into a master shop agreement and that Sloane 
had said, among other things, that a letter had been 
sent "the previous Friday, petitioning for an election 
. . ." [R. T. 1725-1726]. On cross-examination, Berno 
reiterated his testimony. [R. T. 1777]. 

Thus, when the record is reviewed, the overwhelm- 
ing weight of evidence points clearly to the fact that 
Sloane, rather than contradicting the deception set 
forth in R. Empl. Exs. 4, 5, and 6, and rather than 
explaining to the employees that the cards could or 
would be used for a purpose other than an election, 
compounded these misrepresentations by dinning into 
the ears of these employees at organizational meetings 
that the sole purpose of obtaining cards was for one 
end, and one end alone, to have an election. 

And the Union's not so subtle method of deception 
was carried on in the plant by Union organizers and 
adherents who sought to get other employees to sign 
cards. Constantly and consistently, Union solicitors in- 
side the plant impressed upon often reluctant fellow 
employees the asserted fact that cards were only to gain 
an election. For example, Christenson, who at the time 
of the hearing was working for another company, tes- 
tified that Cantrell. one of the leading Union sup- 
porters in the plant, several times approached him and 

tion existed. Moreover, the Trial Examiner expressly found 
that Sloane told the employees that the Union was seeking repre- 
sentation, "and that this would come through elections conducted 
by the [Board]". [C. T. 24, line 56, to 25^ line 4]. 



—47— 

asked him to sign a card. Christenson told him that he 
would not sign one, but Cantrell said, on one occasion, 
that if Christenson did not sign one, then Cantrell him- 
self would sign one for him and send it in. He further 
told Christenson that if Christenson signed the card, 
he would be under no obligation whatsoever and all it 
would do would have the effect of putting him on the 
maiHng list [R. T. 1458, line 18, to 1459, line 9]. Chris- 
tenson further testified that both Irving Klein and 
Ahlstrom, two other strong Union adherents who were 
attempting to have other employees sign cards, sought 
to have Christenson sign one as well and told him 
in the presence of many other employees (including 
Estrada) that "if I signed the card, I wouldn't be 
under any obligation; just sign it and I would be on the 
mailing list and at that time there would be a vote 
to see if the Union would come in or not." [R. T. 1460, 
Hne 24, to 1461. line 19]. On cross-examination, 
Christenson reiterated his testimony [R. T. 1464, lines 
7-17; 1465, line 3, to 1468, line 23]. 

Garrett testified that during the time that cards 
were being passed out, George Wilson, another Union 
adherent, requested him to sign a card and when Gar- 
rett indicated he wanted more information as to the 
Union before signing, Wilson advised him that by 
signing a card, he would be on the mailing list and 
would have the information mailed to his home. Wil- 
son stated to Garrett that "If there were enough cards 
within a certain length of time, the Company would 
be petitioned for an election." [R. T. 1419. line 18, 
to 1421, line 6]. An offer of proof was made at this 
point that Garrett signed the card to enlighten himself 
and would not have signed it if he thought there would 
not have been an election. The offer of proof was re- 
jected [R. T. 1421, Hnes 17-20]. A similar offer of 
proof in regard to Haeler was made and rejected [R. T. 
1795]. 



As pointed out elsewhere in this brief, Homnan 
(Narathip) was extremely limited in his ability both 
to speak and understand English and did not make out 
his own card but that his fellow Thai countryman 
(Anothaiwongs) did. Homnan, who admitted and 
whose testimony makes obvious that he had virtually 
no understanding about unions, heard fellow employees 
talking about an election and, based on that, Homnan 
signed a card. (The last statement was considered 
"going to intent" and the General Counsel's objection 
was sustained.) [R. T. 495, line 2, to 496, line 16]. 
On recross-examination, Homnan reiterated that be- 
fore signing his card, he had heard talk about an elec- 
tion and that he was not very clear about the Union 
[R. T. 498, lines 9-24]. Once again, the General Coun- 
sel's objection was sustained to the question to this 
witness as to the reason for his filling out a card 
[R. T. 500]. 

An offer of proof was made, though rejected, that 
the employee Hunt was approached by Voegeli, a fel- 
low employee in support of the Union, and was told 
that the card was only for the purpose of bringing 
about an election and that it didn't mean anything 
else [R. T. 1475, line 2, to 1476, line 19]. 

Knoles (Knowles), a retired employee of Petitioner 
at the time of the hearing, testified at the time he 
signed his card he had been under the impression that 
the Union was seeking a unit for the entire Southern 
California tool and die industry [R. T. 414, lines 14- 
22; 416, line 23, to 417, line 6] and based upon the 
fact that there would be an election in the entire indus- 
try, he signed a card [R. T. 417, lines 20-25]. This 
impression by Knoles was obtained from what em- 
ployees were saying and from the Union literature that 
had been posted in the restrooms [R. T. 419, line 20, 
to 420, line 8]. When Voegeli approached him and 



—49— 

asked him to sign the card [R. T. 418, Hnes 24-25], 
in answer to the General Counsel's question as to 
whether Voegeli told him the card was "only for an 
election," Knoles replied, "He said it was for an elec- 
tion — so we could have an election. . . . We wanted 
an election for Union representation." [R. T. 422, line 
21, to 423, line 18]. 

An offer of proof was made that Mancini was pre- 
sented with a card by George Wilson and was told by 
the latter that "the card means nothing at all; it is 
simply to bring about an election." The offer of proof 
was rejected [R. T. 1487, lines 3-23]. Mansfield tes- 
tified that he discussed the cards with other employees, 
at least a dozen times, and that it was repeatedly 
stated that the purpose of the card was for the "right 
to petition an NLRB election, a very common proce- 
dure." When asked his understanding of the card when 
he signed it, an objection was sustained by the Trial 
Examiner who recognized that there might be an "in- 
consistency of [his own] ruling on this question." 
[R. T. 627]. Mellone testified that Irving Klein gave 
him a card and : 

"Mr. Klein said that there was a percentage of 
cards needed for an election. He told me that no- 
body would see the card; that it would be non- 
committal; only as an intention on my part for 
the union representatives — to have them have an 
election." [R. T. 1437, lines 4-8]. 

Polony testified that he was concerned by the fact 
that the card stated that it authorized the UAW to rep- 
resent him; accordingly, he asked a number of fellow 
employees what it meant and was told that the card 
itself "didn't mean a thing." This statement was made 
to him by those employees who were urging him to 
sign. On cross-examination by the General Counsel, 
Polony testified : 



—50— 

Q. Do you recall who told you the card was 
for an election? 

A. I couldn't tell you which exact guy it was, 
because I might tell you the wrong guy, but I 
know it was one of the guys that was strongly 
for the Union. 

Q. You don't know which employee told you 
that ; is that correct ? 

A. Not the particular one, but it was — there 
were at least three of them. 

Q. What did this employee tell you about the 
card? 

A. Well, when I asked him about the authoriza- 
tion without an election, he told me, 'Don't worry 
about that. It is just a formality. We have got to 
have an election.' " [R. T. 1378, lines 4-15]. 

An offer of proof was made, though rejected, that 
Polony signed the card solely because of what was told 
him, to wit, that the card was simply to have an elec- 
tion and had no other meaning [R. T. 1374]. Rhedin, 
who testified that he did not read the card carefully, 
was presented his card by Voegeli who told him that 
"they were trying to get an election." For this reason, 
Rhedin signed. An offer of proof was made that he 
would not have signed the card if he did not think there 
would be an election. Based upon what he was told, 
the offer was rejected [R. T. 1449, line 10, to 1451, 
line 1]. Similar testimony was given by Scovel and 
Senyk but offers of proof were rejected to the effect 
that each of them was told by the person who was 
seeking their signatures on cards that the purpose of 
the card was merely for an election [R. T. 1403; 1493]. 
Virgil testified on direct examination that at the time 
he signed there had been a great deal of talk in the 
plant that the purpose of signing cards was to bring 
about an election [R. T. 380]. The Trial Examiner 



—51— 

sustained the objection to Petitioner's question of Vir- 
gil as to whether or not he would have signed if he 
thought there would not have been an election [R. T. 
382]. Virgil testified that Johnson told him when he 
requested that Virgil sign a card that ''it would author- 
ize the Union to come into the shop with enough cards — 
with enough cards it would bring in an election." [R, T. 
382, line 19, to 383, line 3]. 

Taking all the above evidence together, there is no 
doubt the Union deliberately and its adherents (pos- 
sibly innocently) duped the employees of the plant 
into believing that, notwithstanding the language of the 
cards, they were to be used solely to gain an election.^^ 
At this stage, to utilize these cards to assert that the 
Union had a true majority of employees who desired 
that the UAW represent them for collective bargain- 
ing purposes would be to reside in an Alice in Wonder- 
land world. Neither the Board nor the courts should 
lend support to this type of constructive, if not ac- 
tual, fraud. Thus, it is Petitioner's position, upheld by 
many circuit courts, that the cards, generally, under 
these circumstances, may not be given effect, as the 
General Counsel would desire. See Bauer Welding and 
Metal Fabricators, Inc.; Crawford Manufacturing Co.; 
Shelby Manufacturing Company, supra. 



^^The record shows that other employees were also victims oi 
other types of misrepresentations and coercion that affected the 
validity of their cards. For example, an offer of proof was made 
that Ampthor signed his card in order to get employees off hia 
back who were repeatedly pestering him to sign [R. T. 651 ; 
1237]. Anothaiwongs told supervisor Isaac that employees were 
bothering him to sign, that they were very "nasty" to him and 
that he wanted to keep the Union adherents off his back 
[R. T. 1564-1565]. An offer of proof was made that Seymour, 
who did not read his card, signed in order to remain on friendly 
terms with his fellow employees and did not want the UAW to 
represent him [R. T. 1442-1443]. An offer of proof was made 
that Addison was told by solicitor Kastendick that if he signed, 
the Union would have 100% of all employees [R. T. 1490]. 



—52— 

Moreover, particular cards, at any rate, must be 
eliminated because the signators had individually been 
hoodwinked and misled as to their purpose. Among 
those particular cards which are not valid for the pur- 
pose of determining whether the Union had a majority 
are the following : 

1. G.C. 31 — Knoles (Kwowles) — This witness, who 
testified that he signed under the impression that he 
thought it was going to be for the entire Southern 
California industry, and was so told, testified in an- 
swer to the General Counsel's questions that solicitor 
Voegeli told him that the purpose of the card was to 
have an election [R. T. 414, lines 14-22; 416, line 
23, to 417, line 6; 417, lines 20-28; 418, lines 24-28; 
419, line 20, to 420, line 8; 422, Hne 21, to 423, line 18]. 
Under these circumstances, in light of the entire rec- 
ord, Knoles' card cannot be counted. 

2. G.C. 34 — Proudfoot — This witness, who could 
not recall the date he signed the card and could not 
recall whether or not he read it, assumed that the card 
would "just lead to an election." When asked to state 
his understanding and meaning of the card, he tes- 
tified that he understood that an election comes first 
[R. T. 480, line 12, to 481, line 16; 482, line 12, to 
483, line 24]. In light of the fact that the authenticity 
of the card to begin with is in question because of the 
doubt as to its dating and, more particularly, in view 
of the fact that the witness did not read the card 
and his understanding was that it would "just lead 
to an election," this card, too, cannot have the eviden- 
tiary weight the General Counsel requests. 

3. G.C. 43 — BovBe — This witness testified that 
Sloane "explained the cards to us. He said at such 
time we would have enough, we would have an elec- 
tion." [R. T. 1426, lines 12-13; 1427, lines 14-23; 



—53— 

1432, lines 2-19]. Under the circumstances, therefore, 
the card may not be added to the Union's total. 

4. G.C. 44 — Cheetham — This individual, who had 
been a member of labor unions both in England and 
Canada before coming to this country and was a shop 
steward in England, testified that based upon his Union 
experience in those countries, a secret election must be 
held before the Union is selected [R. T. 1410, line 3, 
to 1411, line 22; 1418]. Though the answer was strick- 
en after objection, the witness testified that he would 
not have signed if he thought there would not be an 
election [R. T. 1412, line 20, to 1413, line 23]. As 
the Trial Examiner indicated, the man's past history 
certainly is a matter for consideration and, we sub- 
mit, negates the purported effect of the language of 
the card, particularly in light of the Union's repeated 
statements as to its purpose. 

5. G.C. 45 — Christensooi — This former employee 
during the winter-spring of 1965, was one of the lead- 
ing anti-union employees in the plant. As indicated 
above, he was presented his card by solicitor Cantrell 
who, after Christenson said he was against the Union, 
told Christenson that he would be under no obligation 
whatsoever and it would only be putting him on the 
maiHng Hst [R. T. 1458, line 18, to 1459, line 9]. 
Other employees who were distributing cards and urg- 
ing him to sign told him the same thing and explained 
to him that there would be an election and he could 
then vote as he would want [R. T. 1460, line 24, to 
1461, line 19; 1464, lines 6-17; 1465, line 3, to 1468, 
line 23]. It is clear, therefore, that this card must be 
discarded. 

6. G.C. 47 — Cisneros — This witness testified that 
based upon what he heard and what other employees 



—54— 

had told him about the Union, he understood there was 
going to be an election and he testified he recalled 
Sloane stating the Union was going to call an election 
and that all it needed was 51 per cent of the employees 
to "call an election." [R. T. 581, lines 19-24; 583, 
lines 4-14; 585, hne 4, to 586, line 13]. Accordingly, 
Cisneros' card cannot have the evidentiary weight 
sought by the General Counsel. 

7. G.C. 52 — Cudu — This employee had been work- 
ing for Petitioner for nine years, prior to which he 
Hved in Canada and Czechoslovakia [R. T. 1501-1503]. 
He was a member of a union in Canada [R. T. 1504]. 
He testified that at the time he went to the meeting 
and based upon what he heard at the meeting, it was 
his understanding from what the speaker said that 
cards would give the employees the right to have an 
election. An offer of proof was made that he could 
not have signed a card had he interpreted the speaker 
any other way [R. T. 1503-1504]. Under these cir- 
cumstances, in view of the Union's misrepresentations 
both in writing and verbally, the card can have no 
effect. 

8. G.C. 53 — Dellomes — This employee was one of 
the most vigorous anti-union employees in the plant. 
He testified that at three meetings he attended, he 
recalled Sloane stating that the Union had to have a 
certain number of cards "that were enough to gain an 
election and we need more cards to show a greater 
strength of the employees for the Union." Testimony 
showed that Dellomes got into vigorous arguments 
with Cantrell regarding the Union and that he told 
employees that he had signed the card solely to gain an 
election so that the Union matter could be gotten over 
with. In fact, he further testified that he told the em- 
ployees he would quit his job rather than participate in 



—55— 

a union. He did not read the card and an objection 
was made and sustained to a question as to his un- 
derstanding of its purpose [R. T. 1359-1361; 1364- 
1366; 1667]. It would be a travesty of justice to hold 
that Dellomes intended that the UAW represent him. 

9. G.C. 58 — Garger — This employee, who had come 
from Austria to this country approximately five years 
ago, testified that he was present at a meeting where 
Sloane stated that a certain number of cards had to 
be gotten so the "Labor Board could conduct an elec- 
tion." [R. T. 1518, lines 2-5]. Nothing was ever said 
that the Union could represent the employees without 
an election [R. T. 1517-1518]. An offer of proof 
was rejected to the effect that Garger understood the 
card to be for the purposes of an election. Under the 
circumstances of this case, we submit that there can 
be no question that Garger did not intend that the 
Union represent him without first gaining representa- 
tion via a secret election. 

10. G.C. 59 — Garrett — When George Wilson hand- 
ed Garrett a card and asked him to sign it, Garrett 
indicated he had not made up his mind and Wilson 
advised him that if he did sign, he would be on the 
mailing list [R. T. 1419, line 21, to 1420, line 17]. 
Subsequently, Wilson told him that if enough cards 
were gotten, the Company would be petitioned for an 
election [R. T. 1420, line 18, to 1421, line 6]. An of- 
fer of proof was rejected to the effect that Garrett 
signed solely to enlighten himself and would not have 
signed if he thought there was not going to be an 
election [R. T. 1421, lines 7-20]. This employee's card, 
as well, can have no legal effect. 

11. G.C. 66 — Homnan (Narathipj — This employee, 
who obviously had a very limited command of English 



—56— 

and who scarcely understood anything about unions, 
neither filled out nor read his card; indeed, he was un- 
able to read, let alone understand, the words "collec- 
tive bargaining representative." He was told by his 
fellow Thai countryman, Anothaiwongs, that there 
would be an election and he understood that the pur- 
pose of the card was to have an election [R. T. 489- 
500]. To hold that Homnan intended to authorize the 
UAW to represent him without (or even with) an elec- 
tion may possibly excite our imagination but it cer- 
tainly cannot be upheld in law. 

12. G.C. 72 — K'ofink — This witness of the General 
Counsel testified that Sloane stated that the purpose of 
the cards was to have an election and that the reason 
for obtaining cards was to bring about an election. 
The same thing was being said by other employees. 
Nothing was said by Sloane or anyone else that the 
Union could represent the employees without an elec- 
tion [R. T. 503; 507, line 19. to 508, line 22]. It 
was after these misrepresentations were made that 
Kofink signed; the evidence is clear that Kofink was 
actually against the Union and one of the reasons he 
left Germany was because of his experiences with 
unions there [R. T. 780]. To use Kof ink's card to ac- 
complish this coup d' etat in favor of the Union would 
be authorizing an Anschluss. 

13. G.C. 73 — Knhniami — Kuhmann, who came over 
from Germany approximately five years ago and who 
is limited in his use of EngHsh [R. T. 563; 1683], 
was concerned about the pressure being applied on him 
by fellow employees to sign a card. An offer of proof 
was made and rejected that at the time he signed, he 
had no intention of becoming a member of the Union 
though he did think that the Union would get him 
more money. His understanding of the card and the 



—57— 

concept of authorizing the UAW to represent him in 
collective bargaining was, to say the least, vague [R. T. 
563-566]. It is submitted that there is an insufficient 
degree of intent and clarity so as to permit Kuhmann's 
card to be used on behalf of the Union. 

14. G.C. 75 — Lawrence — This employee testified, 
both on direct and cross-examination, that he did not 
recall reading the authorization language on the card 
[R. T. 1481; 1484]. He attended three or four meet- 
ings and signed a card at one of the meetings; he un- 
derstood Sloane to state that the cards were for the 
purpose of having an election [R. T. 1479, line 16, 
to 1480, line 15]. It was his understanding, based 
upon what Sloane said, that if the Union got over 
50% of the employees' cards, it would demand an elec- 
tion [R. T. 1484]. An offer of proof was made and 
rejected that had Lawrence known that the Union could 
represent him without an election, he would not have 
signed [R. T. 1482]. It is quite clear that Lawrence 
was the victim of misrepresentation and that it would 
be highly improper and contrary to this employee's 
rights, to use this card as the UAW desires. 

15. G.C. 83 — Polony — This employee, who testified 
that he was concerned about the language on the card, 
stated that employees who were trying to convince him 
to sign one told him that the authorization language 
"didn't mean a thing" and that the card was strictly 
for an election; the card was just a formality to gain 
an election [R. T. 1372-1373; 1375-1376]. An offer 
of proof was made that Polony signed based upon these 
representations and that he thought that by signing, 
he would merely be bringing about an election [R. T. 
1374]. It would be grossly improper to hold that Polo- 
ny, who made every effort to ascertain the true mean- 
ing of the cards and who, based upon misrepresenta- 



— 5&- 

tions, signed on, should now be told that his reason 
for signing has no meaning. 

16. G.C. 84 — Rhedin — This employee testified he 
did not read his card but that when solicitor Voegeli 
asked him to sign, he told Rhedin that "they are try- 
ing to bring about an election." An offer of proof 
was made that he would not have signed a card except 
for his understanding that there would be an election 
[R. T. 1449-1450]. This card, too, cannot be used to 
favor the Union's cause. 

17. G.C. 91 — Virgil — This witness testified that at 
the meeting he attended, Sloane stressed the impor- 
tance of the cards and stated that the more the Union 
had, the greater its change of winning an election. 
Sloane said nothing about the employees being rep- 
resented by the Union without an election [R. T. 374, 
lines 2-11]. He further testified that at the time he 
was given a card, he stated that he actually was against 
the Union [R. T. 378, lines 17-21]. He was also told 
by the person who gave him the card that if the Union 
got enough cards, "it would bring about an election." 
[R. T. 382, line 19, to 383, line 3]. And throughout 
the period of time that cards were being distributed 
and until the time he signed one. a number of em- 
ployees around the shop were stating that the purpose 
for the cards was to bring about an election [R. T. 
380-381]. Virgil's card cannot properly be used to 
support the Union's alleged majority. 

8. G.C. 93 — Vogl — The Trial Examiner sustained 
objections to Petitioner's questions to this witness, 
both as to his understanding of the card and as to 
what he believed would happen after he signed one 
[R. T. 555-556]. An offer of proof was made and re- 
jected that the witness' understanding of the card was 
that he was authorizing the Union to conduct an elec- 



—59— 

tion and that was his sole purpose for signing. He 
was not informed that the Union could come in without 
an election when he signed [R. T. 556]. This witness' 
testimony made it quite clear that he did not intend 
by signing to authorize the UAW to act as his collec- 
tive bargaining agent. 

19. G.C. 95 — Robert IVeynmr — Weymar testified, 
both on cross and redirect examination, that Sloane 
made it quite clear that the purpose of the card was to 
have an election and that Sloane did not indicate any 
way the Union could become the collective bargaining 
agent without an election [R. T. 529, lines 8-11; 529, 
line 19, to 530, line 13; 531, lines 14-23]. He further 
testified that he discussed with perhaps as many as 
ten other employees the purpose of the card and that 
there would be an election, all these discussions during 
the period of time that the Union was soliciting cards 
[R. T. 522, line 8, to 523, line 14; 541, lines 17-22]. 
Based upon the misrepresentations made to him by 
Sloane, to say nothing of the "general atmosphere" 
regarding the ''forthcoming" election, G.C. 95 does not 
represent the true intent of Weymar to designate the 
Union as his bargaining agent. 

The foregoing evidence, taken separately or together, 
indicates beyond a shadow of a doubt that the Union, 
clearly through design, and its adherents, perhaps 
through innocence, perpetrated specific acts and created 
a general atmosphere that can only be labeled false and 
misleading. The cards, therefore, are not only under 
a cloud of unreliability but in the above specific cases 
must necessarily be discarded. Though at times the 
signators' subjective thoughts are intertwined with the 
objective misrepresentation set forth by the Union and 
its adherents, such evidence should be weighed to- 
gether as case authority now holds. 

The Eighth Circuit in Batter Welding and Metal 
Fabricators, Inc. v. NLRB, supra, was met with a 



—60— 

very similar case. There, as allegedly here, there were 
8(a)(1) and 8(a)(2) violations. There, the Union 
lost the election by a vote of 12 to 11. (Here, the 
Union lost the vote 59 to 40.) There, as here, the 
Union invoked the doctrine of Bernel Foam and, as 
here, the cards themselves were unambiguous. There, 
as here, the Union, however, distributed letters and 
bulletins which clearly purported to emphasize an elec- 
tion to the exclusion of recognition without an elec- 
tion. Indeed, R. Empl. Ex. 6, as well as R. Empl. Exs. 
4 and 5, in the instant case are far more misleading 
and a far greater misrepresentation of the true facts 
than is the letter that the Eighth Circuit relied upon 
in holding that the cards must be discarded because 
of the misleading nature of the Union's communica- 
tions to the employees. ^^ 



■^^The initial Union letter to the employees in that case stated : 
"Dear Friends: 

"YOU CAN HAVE A UNION IN YOUR PLANT IF YOU 
WANT ONE! 

"Just fill out the enclosed authorization card and return it to us. 
The card will then be turned over to the National Labor Rela- 
tions Board, a branch of the United States Government. 
"This is your right under the law. The National Labor Relations 
Board will then conduct an election in your plant by secret ballot. 
"However, the United States Government will conduct an elec- 
tion only if we show them that the employees have asked us 
to represent them. Your employer will never see these cards. 
"If the majority of the employees vote to be represented by the 
Union, the United States Government will then certify the Union 
as the bargaining agent for the employees. 

"The Sheet Metal Workers' Union understands your problems 
and is standing by ready to help you. The sooner we get the cards 
back, the sooner Uncle Sam will conduct an election in your plant, 
and we will be able to help you. 

"You will choose your shop stewards and negotiating commit- 
tee. The Union will work with you to negotiate your own Union 
contract and wages and working conditions you will not be 
ashamed to work under. 

"REMEMBER — -Together we stand united — alone the Company 
owns you! BELONGING TO THE RIGHT UNION 
DOESNT COST— IT PAYS!" 



—61— 

And there, as here, the Petitioner urged that based 
upon the employees' own testimony, cards were signed 
because of what the Union representatives and adher- 
ents had said; employees were under the belief that they 
were merely indicating their desire for an election. The 
Court said: 

"In support of the above determination, we 
note that no less than six of the petitioner's em- 
ployees testified before the Examiner that they 
signed and returned their cards to the Union be- 
lieving only that they were indicating their desire 
for an election. On of the respondent's own wit- 
nesses, David Nelson, testified on direct examina- 
tion: 

'Q. At the time that you signed that card, 
did you personally want the union to represent 
you? 

A. I wasn't sure, because I didn't know any- 
thing about it. I never worked in a union shop 
before, so I had no knowledge of it, outside of 
the letter which I had received with it. I talked to 
very few, so my information was very scarce.' " 

The Court recognized that under the circumstances, 
some subjective evidence was being accepted by it. 
Noting that the rule is generally that subjective type 
evidence cannot negate the action of signing a card, 
the Court stressed that where there are misrepresenta- 
tions, then to disallow such employee testimony as to 
their purpose for signing would constitute nothing less 
than an invitation to fraud on the part of unions. The 
Court said : 

"The Board objects to the admission of such 
testimony on the basis of language to which we 
lend approval in Colson Corp. v. N.LR.B., supra, 
at page 135 of 347 F.2d, wherein we acknowledge 
that an employee's after-thoughts as to why he 



—62— 

signed a union authorization card would not ne- 
gate his overt action of having signed the card. 
There can be no doubt that this is the general 
rule without misrepresentation being present. Mis- 
representations, however, are present herein to the 
extent that petitioner's employees relied on the let- 
ter and believed that they were only showing a 
desire to have an election by signing the cards. 
Without this qualification, a union could be blat- 
antly guilty of the most flagrant misrepresenta- 
tions and be protected through the disallowance 
of any employee's testimony, once the employee 
signed the authorization card. Cf., Restatement of 
Torts, §525 1938). See, N.L.R.B. v. Peterson 
Bros., Inc., 5 Cir., 1965, 342 F2d, 221, 224." 

The Court went on to point out : 

"Even without considering the testimony of the 
employees as to why they signed the cards, there 
still is strong and persuasive evidence indicating 
that many of the employees who signed the cards 
did not intend anything more than just authoriz- 
ing an election by their act. The strongest evi- 
dence is the May 19, 1964 letter itself. Further 
evidence indicates that Johnson, who signed the 
letter, told Gerald Wachowiak, in a telephone con- 
versation which took place on or about June 2, 
1964, that: 

'A. Well, he said that they had a majority 
of the cards, and that after he received a few 
more cards, there would be an election. 

Q. Mr. Johnson told you at that point that 
there would be an election, is that correct? 

A. Yes ' 

"In N.L.R.B. V. Peterson Bros., Inc., supra. 
the court held that because of an ambigfuity in 
the authorization card the holding of the Board 



—63— 

as to representation was clearly erroneous. There- 
in Chief Justice Tuttle stated, at page 224 of 342 
F.2d: 

'In view of the language on the face of the 
card that "this is not an application for mem- 
bership" and the language that in the alterna- 
tive it is "for an NLRB election" we think 
there was a burden on the General Counsel to 
establish by a preponderance of the evidence 
that the signer of the card did, in effect, what 
he would have done by voting for the union in 
a Board election. We think that in refusing 
to consider this subjective intent of the signer 
of the card, in Hght of the ambiguity on the face 
of the card, the Board erred. Upon a careful 
examination of the record we conclude that the 
Trial Examiner correctly found that the desig- 
nation cards signed by Rhodes and Wright were 
not valid designations for the union. We con- 
clude that the Board's finding to the contrary 
is not based on substantial evidence on the rec- 
ord as a whole.' 

The court denied enforcement of the § 8(a)(5) 
charges. In so doing, it cited with approval 
N.L.R.B. V. Koehler, supra. In critical mood, Judge 
Tuttle stated at page 225 : 

'It would be very simple for the union to 
prepare a card that in an unambiguous form 
would authorize union representation as a bar- 
gaining agent. If the union also wished to have 
cards signed to call an election this would also 
be a very simple matter. There can be little ex- 
cuse for combining the two in a card that makes 
possible the misrepresentation that the Board 
found to have existed. . . .' 



—64— 

In the instant case the authorization card clearly 
and without ambiguity designated the Union as 
the employees' bargaining agent. The covering let- 
ter, however, is most ambiguous and most mis- 
leading. It could well be classified as intentional 
double-talk. The effect of the covering letter here- 
in is no different from the effect of the authoriza- 
tion card in Peterson Bros." 

Such is undoubtedly the case here ; indeed, the Union's 
misrepresentations here were more pronounced, more 
consistent and, clearly, every bit as effective. 

Thus, in summary as to whether the Union had a 
majority at the critical time, we note again that the 
General Counsel presented 65 cards which, arguably, 
evidence exists in regard to their authenticity. As to 
many of these cards, however, their authenticity is in 
question in that it was supported solely upon the tes- 
timony of the General Counsel's handwriting expert. 
Since Petitioner was improperly and prejudicially pre- 
vented from adequately cross-examining that witness, 
we submit that many of these cards have not passed 
the test required and their use is precluded. Cf. Maphis 
Chapman Corp. v. NLRB, 368 F. 2d 298 (4th Cir., 
1966). 

In any event, in light of the gross and consistent 
misrepresentations, which, at best, can be called deliber- 
ate double-talk on the part of the Union, none of these 
cards can truly be said to represent the intent of the 
signators, particularly when not supported by inde- 
pendent evidence. The Trial Examiner's self-satisfying 
reasoning that "intelligent" employees could not be mis- 
lead is a sangfroid that excites our imagination but 
insults our intelligence. 

At any rate, however, the 19 cards where specific 
misrepresentation was shown (m addition to the Union's 



—65— 

false and misleading written communications) must be 
subtracted from the 65 figure. In ascertaining whether 
the Union had a majority of the employees, to include 
in any such tabulation the cards of the most violent 
anti-union employees in the shop — who at all times 
stated they were signing solely to get the election over 
with— (Dellomes [R. T. 1359-1361; 1364-1366; 1667]; 
Christensen [R. T. 1458. line 18, to 1461, line 19; 
1464, lines 6-17; 1465, line 3, to 1468, line 23]), as 
well as employees who were plainly concerned about 
the language of the card, inquired about same and 
were told by Union adherents and organizers that the 
card was merely to have an election or that all it 
would mean would be that they would be on the mail- 
ing list (Polony [R. T. 1372-1376] ; Garrett [R. T. 
1419-1421]), and employees who are recent immi- 
grants to this country, in many cases can scarcely 
speak or understand English, converse in another 
tongue and whose ideas of unionization are based upon 
knowledge of union organization in foreign countries 
wherein the concept of having a union represent em- 
ployees without an election is either anathema or in- 
conceivable or both (Cheetham [R. T. 1410, line 3, to 
1411, line 22; 1412, line 20, to 1413, line 2Z; 1418]; 
Cuda [R. T. 1501-1504]; Garger [R. T. 1518]; Hom- 
nan [R. T. 489-500]; Kofink [R. T. 780]; Kuhmann 
[R. T. 563-566; 1683]; Proudfoot [R. T. 480, line 
12, to 481, line 16; 482, line 12, to 483, line 24; 876, 
lines 17-23; 1332, lines 16-21; 1534, line 3, to 1535, 
line 22] ; Vogl [R. T. 555-556] ; Robert Weymar [R. T. 
522-523; 541]), and/or were individually led to believe 
that the purpose of the card was to have an election, 
is indefensible. As a consequence, at the most, only 46 
cards withstand the burden of proof as to their au- 
thenticity and validity. 

As indicated at the beginning of this argument, 114 
names remain on G.C. Ex. 101 as being part of the 



unit. The status of only one employee is in question. 
Thus, for the General Counsel to show that the Union 
had a majority at the critical time, he would have had 
to present and prove both the authenticity and validity 
of at least Z)7 employee cards. He has patently failed. 
The Union never had a true majority. ^^ Accordingly, 
the Beniel Foam doctrine cannot apply; at most, there 
should be a new election, 

C. The Record Demonstrates That Petitioner Had 
a Good-Faith Doubt That the Union Repre- 
sented a True Majority of Its Employees. 

Assuming, without in any way conceding, that some 
violations of Section 8 are attributable to Petitioner 
and further assuming, purely arguendo, that the Union 
did represent a majority of its employees when such 
violations were allegedly committed, the Union still 
would not be entitled to an order acquiring Petitioner to 
bargain based on this record. A whole series of Board 
and Court decisions establish that an employer is obli- 
gated to honor the recognitional demand of a union 
only if it lacks a good faith doubt regarding the 
union's majority status. If such a good faith doubt 
exists the employer is privileged to insist upon a Board- 
conducted election. It is not only incumbent on the Gen- 
eral Counsel, therefore, to prove a majority, and viola- 
tions of Section 8 of the Act, to justify a bargaining 
order, but in addition to prove that the employer has re- 



^■*As the Associate General Counsel of the Board, in review- 
ing the law on this field, has stated, unions who desire to rely 
on authorization cards as proof of their majority "would be well 
advised ... in soliciting employees, not to make representations 
which might raise questions as to whether the signing employees 
freely and genuinely intended to designate the union as their col- 
lective bargaining representative.'' Gordon, "Union Authoriza- 
tion Cards and the Dutv to Bargain", Daily Labor Report, 32, 
BNA, February 15, 1968. 



—67— 

fused recognition in bad faith. Aaron Bros, of Cali- 
fornia, 158 NLRB 1077 (1966); Strydel, Inc., 156 
NLRB No. 114 (1966) ; Harvard Coated Products Co., 
156 NLRB 4 (1966); Hammond & Irving, Inc., 
154 NLRB 84 (1965); NLRB v. lohnnie's Poultry 
Co., 344 F. 2d 617 (8th Cir. 1965) ; Don The Beach- 
comber V. NLRB, 390 F. 2d 344 (9th Cir. 1968). 

Moreover, when the employer, as here, establishes by 
uncontradicted evidence ample independent grounds for 
a good faith doubt it is not enough that the General 
Counsel merely counter with evidence of the commis- 
sion of unfair labor practices. See McQuay-Norris 
Mfg. Co., 157 NLRB 131 (1966), where the Board 
said: 

"Not every act of misconduct necessarily vitiates 
the (company's) good-faith. For, there are some 
situations in which the violations of the Act are 
not directly inconsistent with a good-faith doubt 
that the union represents a majority of the em- 
ployees." 

The Board added: 

"The doctrine that an employer will not be heard 
to plead a good-faith doubt that his employees wish 
to be represented by a union when he has engaged 
in unfair labor practices at the same time that the 
union has been pressing its claims is not to be ap- 
plied mechanically in all cases. It is not a per se 
doctrine. It must at least appear that the unfair 
labor practices were committed in an effort to dis- 
sipate the union's majority, and that the unfair 
labor practices were in fact responsible for the 
loss of the union's majority." (Emphasis supplied) 

For further explication of the Board's position, see 
Hercules Packing Corp., 163 NLRB 35 (1967), Monroe 
Manufacturing Co., 162 NLRB 8 (1966). 



—68— 

The Second Circuit, in NLRB v. River Togs Inc., 
382 F. 2d 198 (2nd Cir. 1967), placed the issue of good 
faith in proper and sharp focus. There, as here, the 
treatment of the good faith issue both by the Trial Ex- 
aminer and the Board panel was cursory. There, as 
here, the Board merely referred to an extensive anti- 
union campaign and found without further discussion 
that the company's failure to accord recognition was 
grounded upon a desire to thwart unionization. 

On the other hand, the Court analyzed the good faith 
issue at some length: 

". . . We see no logical basis for the view that sub- 
stantial evidence of good-faith doubt is negated 
solely by an employer's desire to thwart unioniza- 
tion either by proper or even by improper means. 
[The employer] had much reason to doubt 
the Union's claim to a valid majority. . . . His ef- 
forts to counter the Union, . . . were 'as consistent 
with a desire to prevent the acquisition of majority 
status as with a purpose to destroy a existing 
majority.' Lesnick, supra, 65 Mich. L. Rev. at 855. 
As Judge Learned Hand said in a similar context, 
his response 'however unlawful in itself it may 
have been, throws substantially no light on how far 
he thought the effort had succeeded to form a 
union. As a penalty it might be proper, but as a 
link in reasoning it seems to us immaterial.' 
NLRB V. James Thompson & Co. supra, 208 F.2d 
at 746." 

Numerous recent Circuit cases have similarly ques- 
tioned the probative value of contemporaneous unfair 
labor practices in determining an employer's good-faith 
doubt. A good-faith doubt has been sustained and a 
Section 8(a)(5) violation rejected consistently in these 



—69— 

cases even though the employer committed violations 
of the Act during the union election campaign. Textile 
Workers Union v. NLRB, 380 F. 2d 292 (2nd Cir., 
1967); NLRB v. Minnie's Poultry Co,, 344 F. 2d 617 
(8th Cir., 1965); NLRB v. Flomatic Corp., 347 F. 2d 

74 (2nd Cir., 1965); Lane Drug Co. v. NLRB, 

F. 2d (6th Cir., 1968) ; NLRB v. Shelby Manu- 
facturing Company, 390 F. 2d 595 (6th Cir., 1968); 
NLRB V. Morris Novelty Co., 378 F. 2d 1000 (8th 
Cir., 1967). 

The closely analogous decision of Peoples Service 
Drug Stores, Inc. v. NLRB, 37 S F. 2d 551 (6th Cir., 
1967) established guidelines which are appropriate and 
realistic and should apply in the instant case. There 
the Board found the employer had engaged in some 14 
violations of Section 8(a)(1)! The Court sustained a 
majority of these findings. Nonetheless, it found no 
support for an 8(a) (5) finding: 

"The specific question before us is whether there 
was substantial evidence to support the finding of 
the Trial Examiner that there was no foundation 
for Peoples' alleged doubt that the union had a ma- 
jority of its employees who desired representation 
by the union. The mere fact that Peoples was 
guilty of unfair labor practices in connection with 
the union organizational campaign is not sufficient 
in and of itself to negative a doubt on the part of 
management. [Citing cases.] 

"A significant number of employees testified 
that they signed the cards believing that their only 
effect would be to require a secret election under 
the auspices of the NLRB. Some employees testi- 
fied that union organizers and fellow employees 
solicited union membership, stating that the effect 
of signing the authorization cards would be to se- 



—70— 

cure an election in which they would be free to vote 
for or against the union. The union and its or- 
ganizers did not make known to all the employees 
that by presenting cards from a majority of Peo- 
ples' employees they could obtain recognition with- 
out an election. It appears from the testimony of a 
significant number of employees that they were 
misled by union organizers or fellow employees act- 
ing on behalf of the union into believing that the 
only purpose of signing the cards was to obtain an 
election. An important factor to be considered in 
determining whether an employer entertained a 
good faith doubt as to the union's majority status 
is whether the union misrepresented the purpose of 
the cards to the employees. 

'The decisions of the Board as well as the 
opinions of the courts place more emphasis upon 
the representations made to the employees at 
the time the cards were signed than upon the 
language set forth in the cards. If in fact mis- 
representations are made by the union to em- 
ployees to the effect that the only purpose of the 
card is to authorize the union to petition the 
Board for an election, the card will not be con- 
strued to authorize representation, even though 
it contains language to that effect, [citing cases] 

". . . The Examiner says that the widespread coer- 
cion indulged in by Peoples compels the conclusion 
that the advocacy of an election was a device to 
undermine the Union and to gain time and that its 
expressed doubt as to a majority was not made in 
good faith. This is pure supposition and, unlike 
NLRB V. Cumberland Shoe Corporation, supra, 
we do not find evidence to support such an in- 
ference. 



—71— 

"The Examiner discredits Mr. Weaver's reasons 
for doubt. The Examiner assumes that the em- 
ployees who told management that their cards did 
not represent their true intentions, did so to avoid 
the displeasure of their employer. It may as well 
be assumed that they were pressured into signing 
by fellow employees and union representatives. 
This is not a criminal case where Mr. Weaver must 
be persuaded beyond a reasonable doubt. An hon- 
est doubt is all that is required. A doubt in the 
mind of an indimdual is a subjective matter and 
cannot be precisely determined. While the absence 
of a doubt may be proved by circumstantial evi- 
dence, we conclude that, under the facts of this 
case, the Examiner's finding that Mr. Weaver, on 
behalf of Peoples, did not have a good-faith doubt 
is not supported by substantial evidence.'' (Em- 
phasis added). 

The instant case cannot be distinguished from that just 
cited. If anything, it presents a stronger set of facts. 

Assuming, arguendo, that the Trial Examiner cor- 
rectly found that Petitioner violated Sections 8(a)(1) 
and (2) — and his finding of bad faith was bottomed 
entirely upon violations of these particular Sections of 
the Act [C. T. 30] — such violations, at best, were more 
technical than coercive. Most of the conduct alleged 
(but hardly proven) was either of an isolated nature or 
was drawn from statements in campaign literature that 
were, at the most, of a kind so close to the borderline of 
free speech that it cannot be ascertained whether they 
were violative of the Act or protected by it. See, e.g., 
NLRB V. TRW Semiconductors, Inc., 385 F. 2d 753 
(9th Cir., 1967). Such acts of misconduct sparingly 
committed do not destroy Petitioner's good faith when 
all factors are considered. 



—72— 

To establish Petitioner's good faith doubt in proper 
perspective, we shall portray the sequence of events 
leading to that doubt. The entire picture provides a 
basis not only for a good faith doubt but gave Peti- 
tioner every reason to be virtually certain that the Union 
did not have a majority at the time of its demand or 
at any time prior thereto. Attached to this brief is 
Appendix "B," a detailed list of all the pertinent and 
multitudinous transcript references depicting the un- 
denied fact that virtually all Petitioner's employees had 
a practice of freely offering information to Petitioner 
regarding the Union. The nature of this friendly and 
personal employer-employee relationship was instrumen- 
tal in producing Petitioner's good faith doubt and 
served as an objective basis for the compilation of Peti- 
tioner's survey, R. Empl. Ex. 7, infra}^ 



^^In addition, there is considerable uncontradicted testimony 
that Union adherents were told by management representatives 
that participation in union activities was their right and privilege. 
See, e.g., testimony re Burke [R. T. 1658-1659] ; Cheetham 
[R. T. 1410-1411, 7771; Crandall [R. T. 1672]; Christopher 
[R. T. 1689-1690] and Rawl [R. T. 1687-1688]. Manage- 
ment officials also reprimanded, at least on one occasion, em- 
ployees who were against the Union for physically threatening 
employees who were in favor of the Union [R. T. 1319-1320]. 
And throughout the entire preelection campaign, Petitioner vol- 
untarily made available to the Union a large bulletin board which 
enabled the Union to put up numerous announcements and cam- 
paign propaganda right in the middle of Petitioner's plant [R. T. 
821-822]. 

Moreover, anti-union employees were as vocal as avid Union 
supporters. See, e.g., testimony of Addison [R. T. 1491] ; 
Burns [R. T. 1524-1525; 1593]; Pashone [R. T. 1508-1509]; 
Poirier [R. T. 1532-1533] ; Whiteman [R. T. 1435-1436] ; Feh- 
land [R. T. 1397-1398]. A number of employees an- 
nounced to Petitioner's officials that if the Union got in, they 
would quit their jobs. See Clendenin [R. T. 1669-1671] ; Del- 
lomes [R. T. 1359] ; Gardner [R. T. 1598] ; Hibbard fR. T. 
787; 1735-1736]; Kuhmann [R. T. 786] and Meyer [R. T. 
1686-1687]. 

All of this evidence supporting good faith was conveniently 
ignored by the Board. 



—73— 

Petitioner was first made aware of general union ac- 
tivity in the industry late in 1964, through an article in 
a local newspaper concerning the UAW's organizational 
efforts in the tool and die industry in Southern Cali- 
fornia. During this period of time, other articles ap- 
peared in newspapers publicizing that organization's 
drive, but there was no Union activity at Petitioner's 
plant [R.T. 753; 901-930]. 

The first indication of Union activity in the plant 
was on February 22, 1965, when Weitzel, Petitioner's 
president, informed Fink, its general manager, that he, 
Weitzel, had received an anonymous phone call from a 
woman telling him of Union organization or activity in 
the plant [R. T. 765-766; 909-910]. Fink, in turn, 
called Bob Howland, plant superintendent, into his of- 
fice and told him what Weitzel had said about the call 
[R. T. 757-758; 910-911]. Howland testified that 
thereafter beginning around February 22 to 24, 1965, 
many employees began asking him questions concerning 
the Union [R.T. 1218]. 

Both Fink and Howland testified that on or about 
March 3, 1965, Howland gave to Fink a copy of R. 
Empl. Ex. 4 [R. T. 758; 1156] and on or about March 
12 a copy of R. Empl. Ex. 5, Union campaign material 
[R. T. 759-760; 1156-1157]. Howland found both of 
these copies around the shop [R. T. 1295]. The docu- 
ments both allude to a Board election. 

On the morning of March 15. 1965, a Monday morn- 
ing, between 7:00 and 8:00 A.M., Howard Berno, whom 
the Trial Examiner found to be a regular employee 
[C. T. 35, line 3], came into Fink's office, as he and 
other employees frequently had done in the past. Berno 
informed Fink that he had attended a Union meeting 
the previous day (March 14th) as he, Berno, wanted to 
know more about the Union and to be further informed 



—74— 

[R. T. 771; R. T. 852-853; R. T. 1125-1126; R. T. 
1777-1779]. 

Berno informed Fink that a union agent, Sloane, had 
spoken there and said there was going to be "a petition 
for an election." He gave Fink a copy of R. Empl. 
Ex. 6 that had been distributed to the employees. Berno 
also told Fink that some employees there had told him 
that they had gone to the meeting merely to get in- 
formation and were not for the Union [R. T. 770-773; 
852-853; R. T. 1723-1726; 1777-1779]. 

As soon as Berno left the office. Fink called How- 
land in and repeated what Berno had stated [R. T. 
1773; R. T. 855; R. T. 922-923; R. T. 1157]. Fink 
asked Howland's opinion about the matter and How- 
land said that based upon his numerous conversations 
with employees, leadmen and supervisors, he, Howland, 
did not believe the Union had "enough people for a 
petition for an election." [R. T. 773-774; 854-855; 
R. T. 1157-1158; 1220-1222]. Fink asked Howland to 
return to his office that evening to discuss the matter 
further [R. T. 773-774; 853; R. T. 1157]. 

At that point, Howland, in order to verify his opinion 
that the Union did not have a majority, went to Berno, 
and told him to prepare a list of direct personnel and 
maintenance employees, as Howland wished to prepare 
a survey of Union strength. He instructed Berno to 
leave room on the right-hand side of this list to put 
"for" or "against" [R. T. 1158-1160; 1221-1223; R. T. 
1727]. During the rest of the morning, Berno, in ad- 
dition to his other duties, prepared R. Empl. Ex. 7 
(minus the handwriting on the right-hand side under 
the column "for" or "against" the Union, and other 
written notations.) Berno. himself, without instruc- 
tions from Howland, put on the R. Empl. Ex. 7, an 
asterisk beside the names of certain employees because 



—75— 

Berno thought that Howland would be interested in 
knowing how many employees attended the meeting the 
day before. After lunch he gave Howland copies of 
the list [R. T. 1158-1161; R. T. 1727; 1747-1749]. 

That afternoon, for approximately two or three 
hours, off and on, Howland filled in the column de- 
signed "for" or "against" the Union by marking down 
thereon beside each of the employees listed his opinion 
as to whether the employee was for or against the 
Union or was undecided [R. T. 1161; 1235-1236]. He 
made the tally from his recollection of prior conversa- 
tions with employees and leadmen and others. During 
the day, he spoke to certain supervisors and lead per- 
sonnel and asked their opinion on particular employees 
about whom Howland felt he needed more information 
[R. T. 1222-1224; R. T. 1295-1298]. 

That evening, Howland met with Fink in the latter's 
office and brought with him R. Empl. Ex. 7 which now 
contained Howland's designations. Fink never knew of 
the existence of this document before Howland brought 
it into his office that evening [R. T. 774; R. T. 888]. 
The list contained all of the names of employees How- 
land thought would be voting, i.e., the skilled people 
[R. T. 774; R. T. 898-899; R. T. 1161]. The testi- 
mony also shows that the small notations (principally 
the word "no") beside various employees' names, were 
put in by Fink himself during the next three or four 
days [R.T. 775-776]. 

There was and is no question as to the authenticity 
of R. Empl. Ex. 7 nor the purpose for which it was 
prepared. Fink, Howland and Berno all testified con- 
sistently and without any contradiction as to its proper 
purpose and the manner in which it came into being. The 
results depicted by R. Empl. Ex. 7 show beyond per- 
adventure both the good faith approach and doubt of 



Petitioner. Try as did the counsel for the General 
Counsel and the charging party to undermine the ver- 
acity of R. Empl. Ex. 7, it remains proof positive that 
as of March 15th, the day prior to receipt of the Union's 
demand letter, Petitioner clearly believed that a major- 
ity of employees were not in favor of the Union. 

While, the Trial Examiner ignored virtually all the 
above evidence, it is important to note, that he kid not 
discredit R. Empl. Ex. 7 or the evidence from which 
that exhibit had been derived. 

Petitioner's estimation of the sentiments of each and 
every employee there considered, together with all sup- 
porting evidence is incorporated as Appendix "C" to 
this brief. This breakdown and the data which en- 
gendered it is perhaps the most significant evidence of 
the entire case. Research has uncovered no other case 
where the objectivity of an employer in formulating a 
good faith doubt has been more clearly established. The 
evidence was never denied. It was never contradicted. 
Although unaccountably tossed aside by the Board, it 
leaves no doubt that the Petitioner had a good faith 
doubt as to the Union's alleged majority. The Fink- 
Howland conclusion arrived at on the evening of March 
15, and further reiterated over the next few days, that 
the Union "obviously did not have a majority" is fully 
supported on the record and was a conclusion that 
was arithmetically sound and founded upon good faith 
[R. T. 789-790; R. T. 925; R. T. 1172]. 

Indeed, a careful analysis and computation of the ap- 
pended evidence shows that of the 113-114 employees 
stipulated to be in the unit the union would have needed 
57 or 58 employees for a majority. But the evidence 
shows that no less than 59 employees had come out openly 
against the Union. These employees — and in virtually 
every case the evidence is without contradiction — had 
freely and openly communicated this to the Petitioner, 



—17— 

through its supervisors, leadmen and others.^^ In ad- 
dition, another ten employees had let management know, 
near the beginning of March, that they were undecided 
about the Union. ^^ 

Nearly half of the listed employees personally testi- 
fied in support of Petitioner's conclusions. Moreover, 
another half dozen employees had vacillated, indicating 
on one or more occasions opposition to the Union, 
while at other times seeming to favor it.^^ Some 
fifteen employees gave no indication of their position — 
some were on sick leave, others had only recently been 
hired or could scarcely read or write. ^^ So there 
were only between 24 and 28 employees who had in- 
dicated (either directly, by association with other em- 
ployees, or sanguinity) their support of the Union's 
drive. Interestingly enough, 21 employees who signed 
cards clearly indicated to Petitioner they were against 
the Union while another 8 employees who signed 
cards indicated that they were undecided.^" 



^^Addison, Amthor, Berno, Booze, Bradley, Burns, Chavez, 
Cheetham. Christenson, Clendenin, Dale, Dellomes, Estrada, 
Fehland, Freeze, Gardner, Garrett, Gowen, Grice, Hibbard, Hoef, 
Hunt, Kevelighan, Kimura, Knoles, Kocsis, Kofink, Kruse, 
Kuhmann, Lamb (Harold), Lary, Lawrence, Letts, Mancini, 
Mansfield, Moran, Morris, Meyer, Newak, Pashone, Poirier, Pol- 
ony, Proudfoot, Rhedin, Riegler, Schlapp, Scoggins, Scovel, 
Senyk, Seymour, Smith, Stow, Thomas, Vogl, Watts, Whiteman, 
Williams. Zadnik, Zirbel. 

Not included in the total 59 employees who clearly stated their 
opposition to the Union, Fink and Howland also were told by 
the leadmen, later at the hearing stipulated as supervisors within 
the meaning of the Act, that they were against the Union. On 
March 15, neither Fink nor Howland knew the legal status of 
Negret, Woods, Zeman, Lawler, or Payton. 

^'^Anothaiwongs, Cisneros, A. Crandall. D. Doebler, Gumm, 
Mellone, Osdale, Thiekotter, Virgil, U. Weymar. 

^^Conner, Gedminas, Gumm, Hirschmann, T. Klein, Herbert 
Lamb. 

^^Boone, Cuda, F. Doebler. Dominguez, Dufek, Ganske. Gar- 
ger, Harrison, Hinsch, Homnan, Howard, Kojaku, O'Kane, 
Twardowski, Wiley. 

^"Amthor, Booze, Cheetham, Christenson. Dellomes, Estrada, 
Garrett, Hoef. Knoles, Kofink, Kuhmann, Lawrence, Polony, 
(This footnote is continued on the next page) 



—78— 

The record shows that in at least 95 percent of the 
cases, the conversations and employee statements com- 
municated to Petitioner upon which it premised its 
good faith doubt occurred prior to March 8, that is, 
prior to the alleged commission of virtually all the al- 
leged violations of the Act.^^ 

Violations of the Act, even if they occurred and were 
committed, as the Board found, "to dilute whatever in- 
terest in the Union had been engendered among its em- 
ployees [C. T. 30, lines 26-27] or if they "bespoke" a 
fear that the Union was achieving some measure of 
success in its organizing goals" [C. T. 30, lines 37- 
38] or if Petitioner "saw the union as a threat to its 
way of dealing with its employees" [C. T. 30, lines 
58-59], in no way negate that doubt, once established. 
Such violations are absolutely irrelevant to the issue, 
once independent grounds for doubt are established, be- 
cause they are, "just as consistent with a disbelief in 
the majority status of a union as [they are] with a be- 
lief in the majority status. "^^ Lane Drug Co. v. NLRB, 
.... F. 2d .... (6th Cir. 1968) ; NLRB v. S. S. Logan 
Packing Co., 386 F. 2d 562 (4th Cir. 1967); NLRB 
V. River Togs, Inc., 382 F. 2d 198, 207 (2d Cir. 
1967). Thus, the Board's conclusion is without ma- 

Proudfoot, Rhedin, Scoggins, Seymour, Smith, Vogl, Williams, 
Zirbel, Also, Anothaiwongs, Cisneros, A. Crandall, D. Doebler, 
Osdale, Thiekotter, Virgil, U. Weymar. 

^^In this connection there is completely absent from the Trial 
Examiner's decision any finding that the alleged unfair labor 
practices dissipated the alleged union majority. 

-^Indeed, the record discloses only one instance of an employee 
changing his mind because of the actions of any outside 
party. That was Kuhmann who changed in favor of Petitioner 
because he learned of Union seniority policy from someone out- 
side the plant. [R. T. 564, Hne 1, to 565, line 6; 566, line 16, to 
568, line 9]. Other employees who had signed cards indicated 
that the more the Union adherents campaigned, the less they 
favored the Union. See, e.g., Booze [R. T. 1428, lines 3-15] ; 
Cheetham [R. T. 1416. lines 3-22] ; Kofink [R. T. 1575, lines 
11-25]. See also R. T. 1579. 



—79— 

terial supporting evidence in this record, and it fol- 
lows, therefore, that Beniel Foam rationale is inap- 
plicable. 

Even beyond this. Petitioner's position of doubt did 
not rest solely upon arithmetic, but also on the advice 
of experienced labor counsel. On March 16, the day 
following the meeting between Rowland and Fink, Peti- 
tioner received the Union's demand letter [G.C. Ex. 
38]. Fink immediately contacted Carl Gould of Hill, 
Farrer & Burrill, Petitioner's attorneys [R. T. 790, lines 
11-21]. Fink, Howland, Gould and Weitzel met in 
Weitzel's office that evening [R. T. 1173, lines 12-25; 
790, line 22, to 791, line 1]. 

Gould read G.C. Ex. 38 given to him by Fink and 
then asked Fink and Howland their opinion of the mat- 
ter. Fink handed Gould R. Empl. Ex. 7, their survey, 
together with Union literature, R. Empl. Exs. 4, 5 and 
6. Fink told Gould of many of the conversations that 
he, Howland, and others had with employees and how 
the survey had been prepared [R. T. 998, line 16, to 
999, line 4; R. T. 1174, hne 2, to 1175, line 7]. 

Gould read R. Empl. Exs. 4, 5 and 6, which point- 
edly and decidedly told Petitioner's employees of the 
aim of the Union : to gain an election. Both Fink and 
Howland told him of particular instances and the gen- 
eral atmosphere in the plant of employees believing that 
the entire thrust of the Union's organizational drive 
was for an election. Taking this evidence before him, 
Gould advised Fink and Howland that if the Union did 
have a majority of signed authorization cards, they 
were obtained through misrepresentation and the con- 
sistent barrage of Union propaganda to convince the 
employees that there would be an election. ^^ Gould 



^^Gould was aware of two other factors which he weighed be- 
fore advising Petitioner. One, the plant was a virtual United 
(This footnote is continued on the next page) 



—80— 

concluded that the Union did not have an uncoerced 
majority and advised that it would be illegal for Peti- 
tioner to recognize the Union as the collective bargain- 
ing representative of its employees without an election. 
Accordingly. Petitioner sent G.C. Ex. 39, dated March 
19. to the Union, refusing its demand for recognition 
[R. T. 791, line 12, to 794, line 14; 886, line 16, to 
888. line 18; 929, lines 24, to 934. line 5; 950, line 
9. to 959. Hne 12; 994. line 19, to 999, line 4; 1174, line 
1, to 1175. line 19]. 

Under the above circumstances. Petitioner had no 
duty whatsoever to recognize the Union; on the con- 
trary, it had a duty not to recognize the Union: to 
have done so would have violated the rights of its em- 
ployees and Section 8(a)(1) and (2) of the Act. 
International Ladies Garment Workers v. XLRB, 366 
U.S. 731, 739 (1961). 

In Nahas Department Store No. 3, 58 LRRM 1687 
(1965), the Board adopted the Trial Examiner's recom- 
mendation that a complaint, containing an 8(a) (5) al- 
legation, be dismissed. The Trial Examiner in that 
case stated, in language quite apposite here: 

'U'^pon all the evidence which is ample on this 
point. I find it also clear that at all times the 
Company had a good faith doubt that the Union 
possessed majority status in the unit. The testi- 
mony of Nansel and Xuss demonstrates con- 
clusively that more than half the employees in 
the unit at various times had complained to them 

Nations with employees recently arrived from among other coun- 
tries. Germany, Italy, Mexico, Thailand, Japan, xAustria. France, 
Czechoslavakia. England and Canada. '\\'hile proficient crafts- 
men, their knowledge either of the English language or American 
unionization, or both, was limited and they could be more easily 
misled. Too, Gould was ad^^sed, and it is true, that the Union 
was pressuring employees to sign authorization cards even after 
it had made its demand for recognition, which led him to seriously 
question whether the Union really had a majorit}' of cards. 



—81— 

about 'being bothered' by the organizers, or had 
stated that they were not interested in the Union. 
Furthermore, some employees who had signed cards 
stated to Company officials thaty they thought the 
cards were merely for an election, which they con- 
sidered an advantageous way of ending the Union's 
solicitation. Furthermore, the feverish activity 
of the Union agents in making solicitations in the 
store, long after the Union had claimed a ma- 
jority, contributed to the decision of Nuss and 
Nansel that the Union, knowing what it did as evi- 
denced in this record, the Company would have 
committed an unfair labor practice because it could 
not claim that it was unaware that the Union's 
claim of majority status was false. To have 
recognized the Union, under the circumstances 
here present, would have been most dangerous and 
foolhardy. Therefore, I find, that at all times 
from the date of the Union's demand for recog- 
nition until the date of the hearing the Company 
had a good faith doubt of the Union's majority 
status in the appropriate unit. (TXD - (S.F.) - 
28-65, p. 16, 1.45 -p. 17,1.5)" 

Of note is that Petitioner's counsel, Gould, was at- 
torney for Nahas in the cited case. 

In sum, the Board has seriously erred in disregarding 
Petitioner's uncontradicted evidence that doubt of a 
true Union majority was founded in a good faith at- 
tempt to calculate employee sentiment and on advice of 
competent counsel, in favor of erroneous and, even 
more, irrelevant findings that certain unfair labor prac- 
tices occurred in the preelection period. This Court 
should, therefore, deny that portion of the Board's or- 
der which would require Petitioner to bargain with the 
Union on this further ground. 



—82— 

PART 2. 

THERE IS NO SUBSTANTIAL EVIDENTARY SUP- 
PORT FOR FINDINGS THAT PETITIONER 
COMMITTED ANY UNFAIR LABOR PRACTICES. 

The record reflects that during the period prior to the 
election, held in June 1965, both parties, Company and 
Union, conducted an aggressive campaign for em- 
ployee votes. For its part, the Union initiated numer- 
ous organizational meetings and talks with employees, 
distributed an estimated 20-25 pieces of pro-Union Ht- 
erature through the mail and posted another 30-40 
pieces of propaganda on the Union's side of the Com- 
pany bulletin board [R. T. 821-822]. In turn. Peti- 
tioner l